Timothy L Johnson v. Public School Employees Retirement System

STATE OF MICHIGAN

COURT OF APPEALS

AFT MICHIGAN, HENRY FORD FOR PUBLICATION

COMMUNITY COLLEGE ADJUNCT June 7, 2016

FACULTY ORGANIZATION, AFL CIO, AFT, 9:10 a.m.

ALPENA MONTMORENCY ALCONA ISD

PARAPROFESSIONALS, ALPENA

MONTMORENCY ALCONA ISD TEACHERS,

ARENAC EASTERN FEDERATION, BAY

ARENAC SKILLS CENTER FEDERATION,

BROWN CITY EMPLOYEES ORGANIZATION,

BROWN CITY FEDERATION OF TEACHERS,

CHEBOYGAN OTSEGO PRESQUE ISLE

SUPPORT PERSONNEL, CHEBOYGAN

OTSEGO PRESQUE ISLE INTERMEDIATE

PARAPROFESSIONALS, CHEASANING

UNION AUXILIARY SERVICE EMPLOYEES,

CLARE GLADWIN ISD FEDERATION,

CRAWFORD AUSABLE BUS DRIVERS

FEDERATION, CRAWFORD AUSABLE

CUSTODIANS SECRETARIAL FEDERATION,

CRAWFORD AUSABLE FEDERATION OF

TEACHERS, CRAWFORD AUSABLE

SUPPORT STAFF FEDERATION,

CRESTWOOD FEDERATION OF TEACHERS,

CTR FEDERATION, DEARBORN

FEDERATION OF SCHOOL EMPLOYEES,

DEARBORN FEDERATION OF TEACHERS,

DETROIT ASSOCIATION OF EDUCATIONAL

OFFICE EMPLOYEES, DETROIT

FEDERATION OF PARAPROFESSIONALS,

DETROIT FEDERATION OF TEACHERS,

EAST DETROIT FEDERATION OF

TEACHERS, ECORSE FEDERATION OF

TEACHERS, FAIRVIEW FEDERATION OF

TEACHERS, FEDERATION OF TEACHERS,

GLEN LAKE FEDERATION OF TEACHERS,

HALE FEDERATION OF TEACHERS,

HAMTRAMCK FEDERATION OF TEACHERS,

HEMLOCK FEDERATION OF TEACHERS,

HENRY FORD COMMUNITY COLLEGE

-1-

ADJUNCT FACULTY ORGANIZATION,

HENRY FORD COMMUNITY COLLEGE

FEDERATION OF TEACHERS, HIGHLAND

PARK FEDERATION OF

PARAPROFESSIONALS, HIGHLAND PARK

FEDERATION OF TEACHERS, HURON

VALLEY CONTINUING EDUCATION, IMLAY

CITY FEDERATION OF TEACHERS, INKSTER

FEDERATION OF TEACHERS, IOSCO ISD

FEDERATION OF TEACHERS, IOSCO ISD

INTERMEDIATE FEDERATION OF

AUXILIARY EMPLOYEES, KINGSLEY

FEDERATION OF TEACHERS, KIRTLAND

COMMUNITY COLLEGE FEDERATION OF

TEACHERS, LAMPHERE FEDERATION OF

PARAPROFESSIONALS, LAMPHERE

FEDERATION OF TEACHERS, LANSING

COMMUNITY COLLEGE ADMINISTRATIVE

ASSOCIATION, LES CHENEAUX

FEDERATION OF SUPPORT STAFF, LES

CHENEAUX FEDERATION OF TEACHERS,

LAKE CITY SUPPORT STAFF FEDERATION,

LAKE CITY TEACHERS AND

PARAPROFESSIONALS FEDERATION, LAKE

SHORE FEDERATION OF EDUCATIONAL

SECRETARIES, LAKE SHORE FEDERATION

OF TEACHERS, LAKE SHORE FEDERATION

SUPPORT STAFF, MACOMB INTERMEDIATE

FEDERATION OF PARAPROFESSIONALS,

MACOMB INTERMEDIATE FEDERATION OF

TEACHERS, MELVINDALE NAP

FEDERATION OF TEACHERS, MELVINDALE

NAP PARAPROFESSIONALS, MIDLAND

FEDERATION OF PARAPROFESSIONALS,

MIDLAND ISD FEDERATION OF

PARAPROFESSIONALS, MIDLAND ISD

FEDERATION OF TEACHERS, NORTHVILLE

FEDERATION OF PARAPROFESSIONALS,

ONWAY FEDERATION OF SCHOOL

RELATED PERSONNEL, ONWAY

FEDERATION OF TEACHERS, PLYMOUTH

CANTON COMMUNITY SCHOOL

SECRETARIAL UNIT, PLYMOUTH CANTON

FEDERATION OF PLANT ENGINEERS,

ROMULUS FEDERATION OF

PARAPROFESSIONALS, ROSEVILLE

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FEDERATION OF TEACHERS, RUDYARD

FEDERATION OF AIDES, RUDYARD

FEDERATION OF TEACHERS, SAGINAW ISD

FEDERATION OF TEACHERS, TAWAS AREA

FEDERATION OF TEACHERS, TAYLOR

FEDERATION OF TEACHERS, UTICA

FEDERATION OF TEACHERS, VAN DYKE

EDUCATIONAL ASSISTANTS FEDERATION,

VAN DYKE PROFESSIONAL PERSONNEL,

WARREN WOODS FEDERATION OF

PARAPROFESSIONALS, WASHTENAW

INTERMEDIATE SCHOOL EMPLOYEES

FEDERATION, WATERFORD ASSOCIATION

OF SUPPORT PERSONNEL, WAYNE COUNTY

COMMUNITY COLLEGE FEDERATION OF

TEACHERS, WAYNE COUNTY COMMUNITY

COLLEGE PROFESSIONAL AND ADMIN

ASSOCIATION, WAYNE COUNTY RESA

SALARIED STAFF, WEXFORD MISSAUKEE

ISD FEDERATION OF TEACHERS,

WHITEFISH TOWNSHIP FEDERATION OF

TEACHERS, CHEBOYGAN OTSEGO

PRESQUE ISLE ISD TEACHERS and

HEMLOCK AUXILIARY SERVICE

EMPLOYEES,

Plaintiffs-Appellees,

v No. 303702

Court of Claims

STATE OF MICHIGAN, LC No. 10-000091-MM

Defendant-Appellant.

TIMOTHY L. JOHNSON, JANET HESLET,

RICKY A. MACK and DENISE ZIEJA,

Plaintiffs-Appellees/Cross-

Appellants,

v No. 303704

Court of Claims

PUBLIC SCHOOL EMPLOYEES RETIREMENT LC No. 10-000047-MM

SYSTEM, PUBLIC SCHOOL EMPLOYEES

RETIREMENT SYSTEM BOARD, TRUST FOR

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PUBLIC EMPLOYEE RETIREMENT HEALTH

CARE and DEPARTMENT OF TECHNOLOGY,

MANAGEMENT, AND BUDGET,

Defendants-Appellants/Cross-

Appellees,

and

DIRECTOR OF DEPARTMENT OF

TECHNOLOGY MANAGEMENT AND

BUDGET, DIRECTOR OF RETIREMENT

SERVICES OFFICE and STATE TREASURER,

Defendants.

DEBORAH MCMILLAN, THOMAS BRENNER,

THERESA DUDLEY, KATHERINE DANIELS

and COREY CRAMB,

Plaintiffs-Appellees/Cross-

Appellants,

v No. 303706

Court of Claims

PUBLIC SCHOOL EMPLOYEES RETIREMENT LC No. 10-000045-MM

SYSTEM, PUBLIC SCHOOL EMPLOYEES

RETIREMENT SYSTEM BOARD, TRUST FOR

PUBLIC EMPLOYEE RETIREMENT HEALTH

CARE and DEPARTMENT OF TECHNOLOGY,

MANAGEMENT, AND BUDGET,

Defendants-Appellants/Cross-

Appellees,

and

DIRECTOR OF DEPARTMENT OF

TECHNOLOGY MANAGEMENT AND

BUDGET, DIRECTOR OF RETIREMENT

SERVICES OFFICE and STATE TREASURER,

Defendants.

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ON REMAND

Before: SHAPIRO, P.J., and SAAD and BECKERING, JJ.

SHAPIRO, P.J.

On May 19, 2010, the Legislature enacted 2010 PA 75, significantly revising the Public

School Employees Retirement Act (PERA), MCL 38.1301 et seq. In particular, subsection 43e

of 2010 PA 75 required all current public school employees to contribute three percent of their

salaries to the Michigan Public School Employees’ Retirement System (MPSERS).1 These

contributions, which were classified as “employer contributions” to a non-vesting retiree health

benefit program, constituted a mandatory deduction from the employees’ contracted-for

compensation with their respective employers. 2010 PA 75, § 43e. Plaintiffs brought suit,

challenging the constitutionality of 2010 PA 75. The trial court held that the statute violated

plaintiffs’ rights under both the Takings Clauses and the Due Process Clauses of the federal and

state Constitutions, but held that it did not violate the constitutional provisions barring the

impairment of contracts by the state.

The parties appealed to this Court. In AFT Mich v Michigan, 297 Mich App 597, 616,

621, 627; 825 NW2d 595 (2012), vacated by AFT Mich v Michigan, 498 Mich 851 (2015) (AFT

Mich I), we held that that 2010 PA 75 was unconstitutional because it (1) impaired employment

contracts between public school employees and employer school districts in violation of the

Contract Clauses of the state and federal Constitutions, Const 1963, art 1, § 10, and US Const, art

I, § 10; (2) affected a taking without just compensation in violation of the Takings Clauses of the

state and federal Constitutions, Const 1963, art 10, § 2, and US Const, Ams V and XIV; and (3)

violated the guarantees of substantive due process in the state and federal Constitutions, Const

1963, art 1, § 17, and US Const, Am XIV, § 1. On September 27, 2012, defendants sought leave

to appeal to the Michigan Supreme Court, which took no action on the application for nearly two

years. During that time, and in response to this Court’s decision in AFT Mich I, the Legislature

enacted 2012 PA 300, which further modified PERA. See AFT Mich v Michigan, 497 Mich 197,

205; 866 NW2d 782 (2015) (AFT Mich II). The 2012 Act did not repeal MCL 38.1343e, but it

added provisions substantially altering that section’s scope and effect. First, it permitted

employees hired before September 4, 2012 to opt out of the retiree health care system as of the

first day of the pay period that begins on or after February 1, 2013. MCL 38.1391a(5).

Employees that opted out would, as of that date, no longer be subject to the challenged

mandatory three percent reduction, and would not receive any health insurance coverage

premium from the retirement system. MCL 38.1391a(1), (5). Second, the 2012 Act significantly

reduced benefits to those who elected to remain in the retiree health care system. See MCL

38.1391. Third, it provided for a separate retirement allowance for public school employees

hired before September 4, 2012 who elected to pay contributions and remain in the system, but

1

The statute required any public school employee whose salary was less than $18,000 to

contribute 1.5 percent for the fiscal year starting July 1, 2010. 2010 PA 75, § 43e. Beginning

July 1, 2011, all employees were required to contribute the full three percent. Id.

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later failed to qualify for retiree health care benefits. MCL 38.1391a(8). In other words, it

provided a refund mechanism that allowed employee who paid in, but did not ultimately quality

for benefits, to receive a refund on their contributions. Finally, the 2012 Act eliminated

retirement health benefits under the retirement system for all new employees hired after

September 4, 2012. MCL 38.1394a(1).

This Court upheld 2012 PA 300 against a constitutional challenge, reasoning that the

voluntary nature of the contributions and the refund mechanism served to remedy the

constitutional defects identified in AFT Mich I. AFT Mich v Michigan, 303 Mich App 651, 673,

676, 676-679; 846 NW2d 583 (2014). The Supreme Court affirmed. AFT Mich II, 497 Mich at

249-250.

Shortly after its affirmance in AFT Mich II, the Supreme Court vacated our opinion in

AFT Mich I and remanded it to this Court:

for reconsideration in light of the enactment of 2012 PA 300 and this Court’s

decision in [AFT Mich II]. On remand, the Court of Appeals shall consider what

issues presented in these cases have been superseded by the enactment of 2012

PA 300 and this Court’s decision upholding that Act, and it shall only address any

outstanding issues the parties may raise regarding 2010 PA 75 that were not

superseded or otherwise rendered moot by that enactment and decision. [AFT

Mich v Michigan, 498 Mich 851 (2015).]

Per the Supreme Court’s direction, we have considered whether the adoption of 2012 PA

300 or the Supreme Court’s decision in AFT II renders moot any of the challenges to 2010 PA 75

or supersedes any of the constitutional analysis we employed in our earlier review of that Act.

We conclude that neither the legislative amendments, nor the Supreme Court’s decision,

supersedes or renders moot any of the issues raised in AFT Mich I as to the mandatory wage

reductions made during the period 2010 PA 75, but not 2012 PA 300, was in effect (hereinafter

“the mandatory wage reduction period” or “the mandatory period”). We also conclude that

neither the passage of 2012 PA 300, nor the Supreme Court’s decision in AFT Mich II, requires

that we alter the analysis we employed in our now-vacated decision in AFT Mich I as to the

constitutionality of 2010 PA 75 as it existed during the mandatory wage reduction period. The

compulsory collection of three percent of employee wages during that period was

unconstitutional. Accordingly, we remand this matter to the trial court with direction to return

the subject funds, with interest, to the relevant employees.

I. MOOTNESS

The enactment of 2012 PA 300 and our Supreme Court’s decision in AFT Mich II

upholding that Act do not render moot the issues raised in the present cases.

This Court generally does not address moot questions or declare legal principles

that have no practical effect in a case. An issue is moot if an event has occurred

that renders it impossible for the court to grant relief. An issue is also moot when

a judgment, if entered, cannot for any reason have a practical legal effect on the

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existing controversy. [In re Pollack Trust, 309 Mich App 125, 154; 867 NW2d

884 (2015) (quotation marks and citations omitted).]

It is undisputed that during the mandatory period, three percent of public school employees’

contracted-for wages were withheld by their employers. Those wages, totaling more than $550

million, are being held in escrow pending a final determination in this case. The parties agree

that if 2010 PA 75, as it applied during the mandatory period, is found to be constitutional, then

the funds held in escrow will be provided to the state, but that if it is found to be

unconstitutional, then the escrowed funds will be returned to the employees who earned them.

Because determination of the constitutional questions before us will have a practical legal effect

on the disposition of the escrowed funds, the issues raised in these cases are not moot.

We must also determine whether the enactment of 2012 PA 300 and the decision in AFT

II, requires that we alter the analysis in our now-vacated opinion regarding the constitutionality

of 2010 PA 75 as applied during the mandatory period. In our earlier opinion we concluded that

mandated confiscation of employee wages as employer contributions to a system in which a right

to benefits could never vest2 violated several constitutional guarantees. With the enactment of

2012 PA 300, however, all future contributions became voluntary, not mandatory. Unlike the

sums withheld during the mandatory period, all the monies paid from employee wages into the

retirement health system were thereafter paid voluntarily; no employee was or could be legally

compelled to financially invest in a system where the intended fruits were not “accrued financial

benefits.” See Studier v Mich Pub Sch Employees’ Retirement Bd, 472 Mich 642, 658-659; 698

NW2d 350 (2005). The question before us now is whether the change from mandatory to

voluntary contributions set forth in 2012 PA 300 retroactively rendered constitutional the

reduction of wages during the mandatory period.

As with any question of statutory interpretation and application, we begin with the

language of the statute. Lash v Traverse City, 479 Mich 180, 187; 735 NW2d 628 (2007). The

language of 2012 PA 300, as the state concedes, contains no retroactivity provision and makes

no reference to the funds collected during the mandatory period. “Nothing will be read into a

clear statute that is not within the manifest intention of the Legislature as derived from the

language of the statute itself.” Thomason v WCAC Contour Fabricators, Inc, 255 Mich App

121, 124-125; 662 NW2d 51 (2003). Accordingly, we may not read the 2012 amendments as

retroactive nor as governing funds collected prior to its application.

2

Our conclusion was driven by the decision of the Supreme Court in Studier v Mich Pub Sch

Employees’ Retirement Bd, 472 Mich 642, 649, 658-659; 698 NW2d 350 (2005), that retirement

health care benefits did not constitute “accrued financial benefits” and so were not protected

from reduction or elimination by art 9, § 24 of the1963 Const, which provides that “[t]he accrued

financial benefits of each pension plan and retirement system of the state and its political

subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired

thereby.” (quoting Const 1963, art 9, § 24). See also MCL 38.2733(6), providing that “This act

shall not be construed to define or otherwise assure, deny, diminish, increase, or grant any right

or privilege to retirement health care benefits . . . to any person[.]”

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The state correctly points out that if the escrowed funds are turned over to the state they

would be subject to the refund mechanism of 2012 PA 300 for those who ultimately do not

qualify for retirement health care benefits. Specifically, MCL 38.1391a(8) provides that the

refunded sum shall be “equal to the contributions made by a member under section 43e;”

therefore, it must include the sums collected under section 43e from its inception, not merely

after the modifications of 2012 PA 300. Thus, it can be argued that so long as MCL 38.1391a(8)

remains unaltered and in effect, those employees who do not opt out of the new system but do

not ultimately qualify for benefits will not suffer a constitutional deprivation because they will

receive back what they put in, including the sums withheld during the mandatory period. Putting

aside the fact that the number of employees who will qualify for the refund is likely relatively

few, this provision completely fails to address the fundamental constitutional defect imposed by

2010 PA 75 during the mandatory period. The problem was not that mandatory contributions are

in and of themselves unconstitutional. The constitutional problem was, and is, that the mandated

employee contributions were to a system in which the employee contributors have no vested

rights. Because retirement health care benefits are not “accrued financial benefits,” the

legislature has the authority to reduce or eliminate those benefits—including the refund

mechanism of MCL 38.1391a(8)—at any time. While there is no constitutional prohibition

against inviting employees to voluntarily participate in an unvested system, the same is not true

where participation is mandated by law. The wages withheld during the mandatory period were

taken without any legally enforceable guarantee that the contributors would receive the

retirement health benefits provided to present retirees. That has not changed. The sums

withheld during the mandatory period were taken involuntarily and the state still retains the right

to reduce or eliminate retiree health benefits for those who were compelled to surrender their

wages.3

AFT Mich II does not provide a basis to alter our analysis of the constitutionality of the

involuntary wage reductions during the mandatory period.4 Accordingly, we conclude that 2010

PA 75 was unconstitutional as it applied from its effective date through the transition date to the

voluntary system created by 2012 PA 300.

II. CONTRACTS CLAUSE

During the mandatory period, section 43e of 2010 PA 75 operated as a substantial

impairment of the employment contracts between the plaintiffs and the employing educational

entities. The employment contracts provided for a particular amount of wages and 2010 PA 75

required that the employers not pay the contracted-for wages, but instead pay three percent less

3

Indeed, 2012 PA 300 does not even contain a provision to refund the involuntarily withheld

sums to those employees who chose not to participate in the retirement health system after

enactment of 2012 PA 300.

4

In addition, in their supplemental briefs on remand, the parties have not referred us to any

recent caselaw that would suggest we should alter our analysis.

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than the contracts provided.5 We note that this is not a broad economic or social regulation that

impinges on certain contractual obligations by happenstance or as a collateral matter. Rather, the

statute directly and purposefully required that certain employers not pay contracted-for wages.

Such an action is unquestionably an impairment of contract by the state. “In the employment

context, there likely is no right both more central to the contract’s inducement and on the

existence of which the parties more especially rely, than the right to compensation at the

contractually specified level.” Baltimore Teachers Union, American Federation of Teachers

Local 340, AFL-CIO v Baltimore Mayor and City Council, 6 F3d 1012, 1018 (CA 4, 1993). See,

also, Buffalo Teachers Federation v Tobe, 464 F3d 362, 368 (CA 2, 2006) (“Contract provisions

that set forth the levels at which union employees are to be compensated are the most important

elements of a labor contract. The promise to pay a sum certain constitutes not only the primary

inducement for employees to enter into a labor contract, but also the central provision upon

which it can be said they reasonably rely.”).

In Baltimore Teachers, the Fourth Circuit held that a temporary furlough plan under

which employees lost just under one percent of their annual salary for one year constituted a

substantial impairment of contract.6 The present case involves a reduction three times as great

and not merely for a single year. Plaintiffs have agreed to provide their labor and expertise to the

school districts for wages bargained for and set forth in contract. For the state to mandate a three

percent reduction in the contractually agreed-upon price of their labor is unquestionably an

impairment of contract by the state.

That does not, however, resolve the constitutional question. In order to determine

whether that impairment violates the Contract Clause, we must determine whether the state has

shown that it did not: “(1) ‘consider impairing the . . . contracts on par with other policy

alternatives’ or (2) ‘impose a drastic impairment when an evident and more moderate course

would serve its purpose equally well,’ nor (3) act unreasonably ‘in light of the surrounding

circumstances[.]’ ” Buffalo Teachers, 464 F3d at 371, quoting United States Trust Co of New

York v New Jersey, 431 US 1, 30-31; 97 S Ct 1505; 52 L Ed 2d (1977). Put more generally, we

5

Defendants argue that there is no unconstitutional impairment of contract because (1) plaintiffs

do not have a contract that is affected by 2010 PA 75 and because (2) plaintiffs do not have a

contractual right to be free from mandatory deductions for retiree healthcare or to continue in a

particular retiree healthcare plan. These arguments are wholly without merit. Plaintiff

employees’ employment contracts, which set forth specified wages, were unquestionably

impaired by 2010 PA 75’s mandatory and involuntary requirement that three percent of their

wages be withheld and transformed into employer contributions to a retiree health care system

without vested benefits. Moreover, plaintiffs have never claimed that they have a right to be free

of mandatory deductions in general; they have only claimed a right to be free from

unconstitutional, mandatory deductions.

6

The Baltimore Teachers Court noted that “because individuals plan their lives based upon their

salaries, we would be reluctant to hold that any decrease in an annual salary beyond one that

could fairly be termed de minimis could be considered insubstantial.” Baltimore Teachers, 6 F3d

at 1018 n 8.

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are to determine whether the particular impairment is “necessary to the public good. . . .” In re

Certified Question, 447 Mich 765, 777; 527 NW2d 468 (1994) (emphasis added).

In addressing these issues, we must consider that the employers in question are

themselves governmental entities and that these entities benefited as a result of the challenged

legislation given that they used the monies collected as “employer contributions” that they would

have otherwise had to pay to the retiree health care benefits fund.7 Because a governmental

entity is party to the contract and benefits from the impairment, we are to employ heightened

scrutiny in our review of the statute. Buffalo Teachers, 464 F3d at 370-371.

As a general rule, courts have found statutes impairing contractual obligations to be

reasonable and necessary when the impairment is the consequence of remedial legislation

intended to correct systemic imbalances in the marketplace. Such legislation may have positive

or negative effects on particular economic actors and may in some cases result in altered

contractual obligations without offending the Contract Clause. For example, we rejected a

Contract Clause challenge in Health Care Ass’n Workers Compensation Fund v Bureau of

Worker’s Compensation Director, 265 Mich App 236, 242; 694 NW2d 761 (2005), which

involved a statute designed to unclog the marketplace for workers’ compensation insurance by

eliminating unduly anti-competitive contractual provisions that punished employers for changing

insurers. Similarly, the United States Supreme Court held that correcting an imbalance between

gas prices on the interstate and intrastate markets was a significant and legitimate state interest.

Energy Reserves Group, Inc v Kansas Power & Light Co, 459 US 400, 417; 103 S Ct 697; 74 L

Ed 2d 569 (1983). The present case, however, does not involve corrections to the marketplace to

assure free competition.

We recognize that there are cases holding that a modest, temporary impairment of

government contracts may be imposed as a matter of last resort to address a fiscal emergency.

However, as the cases relied upon by defendants show, such circumstances must be

extraordinary and the degree of the impairment in amount and in time is central to the question

whether the impairment passes constitutional muster. “The severity of the impairment measures

the height of the hurdle the state legislation must clear.” Allied Structural Steel Co v Spannaus,

438 US 234, 245; 98 S Ct 2716; 57 L Ed 2d 727 (1978). As in Allied Structural, the statute at

issue here worked “a severe, permanent and immediate change in [contractual] relationships.”

Id. at 250.

In Baltimore Teachers, 6 F3d at 1014, the city of Baltimore responded to sudden budget

shortfalls caused by reductions in state aid of over $37 million during the last three months of

1991 by imposing involuntary furloughs for city employees. These furloughs were not

conceived of as a long-term funding mechanism, but instead as a temporary response to a fiscal

emergency. Id. at 1021. The furlough days resulted in Baltimore reducing annual salaries by

less than one percent and only for a single year. Moreover, while the furloughs were

involuntary, employees were provided with reduced hours that were equivalent to the reduction

7

According to the record, the three percent wage reduction will cover nearly 40 percent of the

overall employer contributions for retiree health care benefits.

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in their wages. The Fourth Circuit held that while the actions constituted an impairment of

contract, they did not violate the Contract Clause because the wage reduction was temporary, the

amount of the resulting reduction in wages was no greater than necessary to meet the immediate

budgetary shortfall, and the city had first taken other actions, including a significant cut in city

services and laying off employees. Id. at 1020. In contrast, subsection 43e of 2010 PA 75

reduced public school employees’ wages by an amount more than three times that which

concerned the court in Baltimore Teachers and did not provide time off in exchange. Further,

the provision was not designed as a temporary measure, and the instant defendants presented no

evidence to the trial court that other means of undertaking long-term restructuring of retiree

health benefit funding had been attempted or even reviewed before 2010 PA 75 was adopted.8

In Univ of Hawaii Prof Assembly v Cayetano, 183 F3d 1096 (CA 9, 1999), the federal

appeals court concluded that the state’s action in delaying paydays by a few days, even without a

reduction in the actual amount of pay, constituted a substantial impairment of contract because

the timing of payment was part of the collective bargaining agreement. Id. at 1102-1104. As in

Baltimore Teachers and Buffalo Teachers, the Univ of Hawaii court noted the higher level of

scrutiny applicable to legislative interference with governmental, as opposed to private, contracts

and struck down the payday delays noting that “ ‘although perhaps politically more difficult,

numerous other alternatives exist which would more effectively and equitably raise revenues’ ”

such as additional budget restrictions, the repeal of tax credits, and the raising of taxes. Id. at

1107; see, also Donohue v Paterson, 715 F Supp 2d 306 (ND NY 2010).

Further many courts have held that impairments of government employee contracts by

the state that have indefinite application clearly violate the Contract Clause. Opinion of the

Justices, 364 Mass 847, 864; 303 NE2d 320 (Mass, 1973) (striking down legislation increasing

present employees’ contributions to retiree benefits without an increase in the subject employees’

own retirement benefits as “presumptively invalid” under the Contract Clause); Singer v City of

Topeka, 227 Kan 356, 369; 607 P2d 467 (Kansas,1980) (holding that a statute mandating

increase in public employees’ contributions to their retirement plan without a commensurate

increase in benefits “is an unconstitutional impairment of contract rights”); Marvel v

Dannemann, 490 F Supp 170 (D Del, 1980); Hickey v Pittsburgh Pension Bd, 378 Pa 300; 106

A2d 233 (Penn, 1954); Allen v City of Long Beach, 45 Cal 2d 128; 287 P2d 765 (Cal, 1955).

For these reasons, we conclude that 2010 PA 75, from its effective date until the

completed transition to a voluntary system, violated US Const art I, § 10 and Const 1963, art I, §

10.

III. TAKINGS CLAUSE

Under the Takings Clauses of the state and federal Constitutions, Const 1963, art 10, § 2,

and US Const, Am V, “[t]he government may not take private property for public use without

8

Indeed, it was only as a result of our decision to strike down 2010 PA 75, that the legislature

undertook its responsibility to consider alternative and constitutional funding mechanisms, such

as the voluntary system implemented by 2012 PA 300.

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providing just compensation to the owner.” AFT Mich II, 497 Mich at 216. The federal

constitutional provision applies to the states through the Fourteenth Amendment, US Const, Am

XIV. Id. at 217. Here, the plaintiff employees’ salaries are specific funds in which they

unquestionably had a property interest. See Sims v United States, 359 US 108, 110; 79 S Ct 641;

3 L Ed 2d 667 (1959) (stating “it is quite clear, generally, that accrued salaries are property”).

There is no doubt that during the relevant time frame, three percent of plaintiff

employees’ wages were “taken” in the dictionary-definition sense of the word. The state does

not dispute that the school districts were taking possession of wages that, by contract, belonged

to plaintiffs and sending them to state-mandated funds as employer contributions. The question,

however, is whether that action constituted a “taking” as it has been defined for purposes of the

Fifth Amendment and its Michigan constitutional counterpart. We conclude that it did.

It is well settled that where government directly seizes property in which a person has a

property interest, a Fifth Amendment taking occurs requiring the government to pay just

compensation. However, taking cases involving a direct seizure of property typically involves

real property and the exercise of eminent domain. Taking jurisprudence also commonly deals

with claims that governmental regulatory actions impose such limits on the use of property that

they amount to a taking.

Defendants argue that the confiscation or seizure of money, as opposed to physical

property, cannot constitute a taking. Defendants point out that several courts have held that the

general imposition of monetary assessments by the government do not raise Fifth Amendment

concerns. See, e.g., McCarthy v City of Cleveland, 626 F3d 280 (CA 6, 2010). The law is,

however, equally clear that where the government does not merely impose an assessment or

require payment of an amount of money without consideration, but instead asserts ownership of

a specific and identifiable “parcel” of money, it does implicate the Takings Clause. Indeed, the

United States Supreme Court has termed such actions “per se” violations of the Takings Clause.

Brown v Legal Foundation of Washington, 538 US 216, 235; 123 S Ct 1406; 155 L Ed 2d 376

(2003). In Brown, the Court held that where the government asserted a right to control the

interest on lawyer trust accounts, even where such amounts were de minimis, it constituted an

unconstitutional taking. Id. We applied this principle in Butler v Mich State Disbursement Unit,

275 Mich App 309; 738 NW2d 269 (2007). In Butler, Judge SAAD writing for the Court, found

an unconstitutional taking of property where the state disbursement unit that collects and

disburses child support payments was depositing interest on the amounts awaiting disbursement

into the state treasury. Id. at 310-312. The amount in question was merely 83 cents and it could

certainly be argued that the state could reasonably assess such a sum to pay for the collection

service that benefited the children and custodial parent. See id. at 311-312. However, because

the money was part of definable and distinct parcel of money in which the eventual recipient had

a property interest, we held it could not be taken without payment of just compensation. See id.

at 313-314.9

9

In Brown, the government was not required to pay compensation because the clients could not

have earned any interest if they had deposited the funds on their own. Brown, 538 US at 239-

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In Webb’s Fabulous Pharmacies, Inc v Beckwith, 449 US 155; 101 S Ct 446; 66 L Ed 2d

358 (1980), a Florida county court retained the interest from a fund in its custody intended for

payment of Webb’s creditors. Id. at 156-158. The Supreme Court held that the Florida statute

authorizing the retention of the interest “has the practical effect of appropriating for the county

the value of the use of the fund for the period in which it is held. . . .” Id. at 164. Further, the

interest could not be treated as a fee for the use of the court because another statute specifically

provided for a court fee based on the size of the fund deposited with the court. Id. at 164. “To

put it another way: a State, by ipse dixit, may not transform private property into public property

without compensation. . . .” Id.10

Defendants rely on to two cases from the Federal Circuit Court of Appeals as support for

their position, but neither case provides such support. In Adams v United States, 391 F3d 1212

(CA Fed, 2004), the federal government had concluded that certain federal law enforcement

personnel were administrative employees and, therefore, were not entitled to overtime pay under

the Fair Labor Standards Act (FLSA), 29 USC 201 et seq. The employees sued under the FLSA

and also asserted that the government’s failure to pay those sums constituted a taking. The

Adams court held that an action to enforce payment of a statutory obligation for payment, unlike

a contract for payment, does not establish a vested property right, without which a takings claim

cannot arise. Id. at 1223. In Adams, the taking claim put the cart before the horse by arguing

that failure to pay overtime constituted a taking before any right to that overtime was determined

to exist. Id. at 1221-1222. This is not the case here because plaintiff employees’ had a contract-

based property right in their own wages.

240. Similarly, in Butler no compensation was ordered because the government’s administrative

costs were greater than the plaintiff’s accrued interest, and plaintiff’s net loss was therefore zero.

Butler, 275 Mich App at 313.

10

In Eastern Enterprises v Apfel, 524 US 498, 503-504; 118 S Ct 2131; 141 L Ed 2d 451 (1998),

the plaintiff alleged that the Coal Industry Retiree Health Benefit Act, 26 USC 9701 et seq.,

violated the Takings Clause because it required the plaintiff, to pay premiums into a fund to

cover benefits for retirees it had not employed. The Supreme Court found this to be

unconstitutional. Four of the Justices concluded that it violated the Takings Clause, while Justice

Kennedy, in an opinion concurring in the judgment and dissenting in part, reached his conclusion

under the Due Process Clause. However, the concerns raised by Justice Kennedy regarding the

applicability of the Takings Clause do not arise in the instant case. In his opinion, Justice

Kennedy stated:

The Coal Act does not appropriate, transfer, or encumber an estate in land

. . . a valuable interest in an intangible . . . or even a bank account or accrued

interest. The law simply imposes an obligation to perform an act, the payment of

benefits. The statute is indifferent as to how the regulated entity elects to comply

or the property it uses to do so.” [Id. at 540 (emphasis added).]

That is by no means the case here. Subsection 43e of 2010 PA 75 confiscated a specific fund,

i.e. plaintiff employees’ paychecks, and removed three percent of the property before allowing

them to take possession of their property.

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Kitt v United States, 277 F3d 1330, 1336-1337 (Fed Cir, 2002) is similarly inapposite

because it involved only a general obligation to pay money under a disputed provision of the tax

code. The government did not assert ownership of any particular property and the court relied on

that very point to reject the takings claim, noting that “[i]n some situations money itself may be

subject of a taking, for example, the government’s seizure of currency or its levy upon a bank

account. . . . In the present case, however, the government did not seize or take any property of

the Kitts. All it did was to subject them to a particular tax to which they previously had not been

subject. That government action did not constitute a taking of the amount of the tax they had to

pay.” Id. at 1337.

Accordingly, for these reasons we hold 2010 PA 75 violated the Takings Clauses of the

state and federal Constitutions, Const 1963, art 10, § 2, and US Const, Ams V and XIV.

IV. SUBSTANTIVE DUE PROCESS

The Fourteenth Amendment to the United States Constitution and Const

1963, art 1, § 17 guarantee that no state shall deprive any person of “life liberty or

property, without due process of law.” Textually, only procedural due process is

guaranteed by the Fourteenth Amendment; however, under the aegis of

substantive due process, individual liberty interests likewise have been protected

against certain government actions regardless of the fairness of the procedures

used to implement them. The underlying purpose of substantive due process is to

secure the individual from the arbitrary exercise of governmental power. [People

v Sierb, 456 Mich 519, 522-523; 581 NW2d 219 (1998) (some quotation marks

omitted; citations omitted).]

In other words, “[t]he essence of a claim of violation of substantive due process is that the

government may not deprive a person of liberty or property by an arbitrary exercise of power.”

Landon Holdings, Inc v Grattan Twp, 257 Mich App 154, 173; 667 NW2d 93 (2003) (emphasis

in original).

Under 2012 PA 300, no employee is required to contribute to a retirement health care

system. See MCL 38.1391a(1)-(4). Under the 2010 Act they were. Under both Acts, the

employees have no vested right to retirement health care benefits. See Studier, 472 Mich at 658-

659.11 Under 2012 PA 300, any contributing employee subject to the three percent deduction in

11

In its supplemental brief, the state appears to suggest that it intends to now direct the use of the

funds differently. However, these vague and non-binding assurances in their brief are not

binding on the state, do not have the force of law, and are wholly irrelevant to the constitutional

question before us. The state does not refer us to any case holding that an unconstitutional

statute should not be struck down because the state’s brief offers a non-binding, non-specific

assurance that it will try to minimize the unconstitutional effects of the statute. The issue before

us is whether 2010 PA 75 was constitutional prior to the effective date of 2012 PA 30. If, as we

conclude, it was not, then the collection of the subject funds was unlawful and they must be

returned.

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MCL 38.1343e is legally guaranteed compensation if he or she later does not qualify for the

benefit, but that was not true under 2010 PA 75. See MCL 38.1391a(8). Despite the state’s

attempt to conflate the two Acts, it is clear that one is consistent with substantive due process and

the other is not.

Defendants argue that the present case is analogous to Mich Mfr Ass’n v Workers’

Disability Compensation Bureau Director, 134 Mich App 723; 352 NW2d 712 (1984), where

this Court upheld a statute requiring all employers in the state to contribute to a fund to help

defray the costs of workers’ disability compensation for the logging industry. However, that

case considered only whether the statute was enacted for a proper purpose and did not address

whether it met the second prong of the constitutional test. Id. at 733-735. Moreover, the statute

related to the broad policy objectives of the workers’ compensation system that affect every

worker and employer in the state. Workers’ compensation legislation was adopted 100 years ago

to create a system to share risks and to provide for the limited, but prompt, compensation of

injured workers. In addition to obtaining general insurance or insuring themselves, all employers

in the state may be required to contribute to specialized funds such as the Second Injury Fund,

the Silicosis, Dust Disease, and Logging Industry Compensation Fund, and the Self-Insurers’

Security Fund. MCL 418.551. These assessments are part of a state-wide economic regulatory

system and contributions to the funding of that system are required of all employers in the state.

The statute in Mich Mfr represented a small modification in an overall system of sharing risks

intended to assure stability in the industrial market-place.

The instant case is wholly different. Payment of health care benefits owed by the

government to a particular set of its retired employees is not analogous to the maintenance of a

statewide risk-sharing system to assure market and economic stability for the private sector.

Rather, it is a question of various levels of government meeting their own fiscal obligations.

Defendants posit no evidence or even argument to suggest that the funding of these retirement

benefits could not have been satisfied by measures that do not raise due process concerns.12 The

mechanism defined in subsection 43e of 2010 PA 75 was neither one involving general taxation

for a general fund with specific uses of the monies later determined by the Legislature nor one

imposing a fee for service to the payee. It was also not a mechanism that required individuals to

fund benefits that they themselves had a vested right to receive. For these reasons, we conclude

that 2010 PA 75 was unreasonable, arbitrary, and capricious and violated the Due Process

Clause.

V. CONCLUSION

We conclude that 2010 PA 75, as it existed from its effective date until the effective date

of 2012 PA 300, was unconstitutional because it violated (1) the Contracts Clauses of the state

and federal Constitutions, Const 1963, art 1, § 10, and US Const, art I, § 10; (2) the Takings

Clauses of the state and federal Constitutions, Const 1963, art 10, § 2, and US Const, Ams V and

XIV; and (3) the guarantees of substantive due process in the state and federal Constitutions,

12

It is clear that such measures, however, exist. See 2012 PA 300 (curing the constitutional

deficiencies in 2010 PA 75).

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Const 1963, art 1, § 17, and US Const, Am XIV, § 1. Accordingly, we affirm the trial court’s

orders granting summary disposition or partial summary disposition in favor of plaintiffs in each

of the cases before us and remand the case to the trial court, which shall direct the return of the

subject funds, with interest, to the relevant employees. We do not retain jurisdiction.

/s/ Douglas B. Shapiro

/s/ Jane M. Beckering

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