Spiller v. State

WATHEN, Chief Justice,

with whom GLASSMAN, Justice, joins, dissenting.

We respectfully disagree that plaintiffs have no contractual right to benefits under the state pension system. The Court’s opinion defeats the legitimate expectations of public employees and defeats the purposes for which the Legislature created the retirement system. The Court’s holding should come as a surprise to the State because it acknowledged that it had a contractual relationship with plaintiffs to provide pension benefits. In our view, the statutory pension system and the relationship between the State and its employees clearly establish a contractual obligation to provide an undiminished level of benefits, and we reject the State’s argument that the facts of the present case justify a unilateral reduction of those contractual benefits.

We agree that plaintiffs carry the burden of overcoming a presumption that a statute does not create contractual rights. The Court fails to recognize, however, that this time-honored rule of construction is a presumption only. The Court gives no consideration in this regard to the nature of a pension system as deferred compensation, (see Annotation, Vested Right of Pensioner *518 to Pension, 52 A.L.R.2d 437 , 441 (1957) (stating that the generally accepted theory of pensions is that they are part of employees’ compensation)), the Legislature’s statement of intent in creating the State Retirement System, or the expectations that the Legislature has fostered among public employees. Although a clear statement in a statute that it constitutes a contract would be helpful, it is not the iron-clad requirement that the Court suggests. The Court would have the test be whether the statute expressly states that it is a contract. A more complex analysis, however, is required. As the United States Supreme Court observed:

The principal function of a legislative body is not to make contracts but to make laws which declare the policy of the state and are subject to repeal when a subsequent legislature shall determine to alter that policy. Nevertheless, it is established that a legislative enactment may contain provisions, which when accepted as the basis of action by individuals, become contracts between them and the State or its subdivisions within the protection of Art I, § 10 [the contract clause of the United States Constitution].

Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 100 , 58 S.Ct. 443, 446 , 82 L.Ed. 685 (1938) (holding that Indiana public school teachers had a contract for continued employment based on legislative history, prior Indiana court rulings, and statutory language including the use of the word, “contract”).

The State, arguing only that plaintiffs have no legally enforceable right to a particular level of benefits and that the impairment of their contractual relationship is justified by the need to reduce state expenditures, assessed its case realistically and acknowledged a contract. The State’s pension plan was created as a benefit to attract and retain qualified employees for public service jobs and to assist public employees in making provision for their retirement. 5 M.R.S.A. § 17050 (1989). 1 To achieve these purposes required an enforceable promise of future benefits. The State characterized its maturing obligations toward these ends as a debt and not as a gratuity. 5 M.R.S.A. § 17151(1) (1989). 2 In apparent recognition that members of the retirement system had an enforceable right to benefits, the Legislature exempted employees’ claims for stated pension benefits from discharge by payment of compensation. 5 M.R.S.A. § 17203(4) (1989). 3 Moreover, the Legislature has historically treated pension benefits as deferred compensation when making changes to the retirement system — either preserving benefits, applying modifications to benefits prospectively to new employees, or providing offsetting benefits. In the floor debate of prospective changes in pension benefits in 1984 for future law enforcement employees, legislators stressed the State’s obligations to its current employees. “This bill grandfathers every state employee on the payroll today_” Leg-is.Rec. 484 (1984) (statement of Rep. Hickey). “The bill is no attempt, either, to gain *519 revenues from state employees or to break faith in any way with either former employees currently on the retirement rolls or with those that are in the work force today.” Id. (statement of Rep. Paradis). “Those people already in the system, in effect, have a lifetime contract as to the nature of their retirement system. They stay with what we have on the books.” Legis.Rec. 590 (1984) (statement of Sen. Collins). This Court itself has recognized that the State has created “legitimate retirement expectations of [state] employees.” Huard v. Maine State Retirement System, 562 A.2d 694, 698 (Me.1989) (quoting Soucy v. Bd. of Trustees of the Maine State Retirement Sys., 456 A.2d 1279, 1281 (Me.1983)).

The Court today repudiates the history and the language of the statutory system largely on its strained conclusion that 5 M.R.S.A. § 17801 (1989) supports a finding that plaintiffs do not have any contractual interest in pension benefits. 4 Neither the language of section 17801 nor its history support the result for which the Court apparently has striven. Section 17801 is ambiguous, perhaps intentionally so, and does not distinguish in its guarantee between employees who have fulfilled the conditions for eligibility and those who have not. The Statement of Fact that accompanied section 17801 refers to benefits that have accrued, not to benefits for which employees are eligible. L.D.1939 Statement of Fact (107th Legis.1975). Furthermore, the Court’s interpretation of section 17801 regarding “the amount of benefits which would be due to a member” as applying only to benefits which are already due ignores the actual wording of the statute. Section 17801 explicitly prohibits a reduction of pension benefits of employees. Contrary to the gloss provided by the Court, section 17801 reflects the Legislature’s intention that pension benefits not be retroactively reduced for current or former employees. Although the Court does not reach the issue today, its interpretation of section 17801 also undermines the pension benefits of those employees who have met the eligibility conditions but who are still accumulating creditable service. Because those employees continue to work, their full benefits are not yet determined so that they are due “on the date immediately preceding the effective date of the amendment.” The Court, given its rationale, will ,be challenged to find legislative intent to create contractual rights “clearly stated” for those employees who have met the eligibility conditions for pension benefits but have not yet retired.

Significantly, having rejected all contractual rights, the Court does not reach any conclusion as to what rights plaintiffs possess in pension benefits. If the inference can be drawn that plaintiffs may have a property interest in pension benefits, (see Note, Public Employee Pensions in Times of Fiscal Distress, 90 Harv.L.Rev. 992, 1003-1005 (1977)), that interest offers the protection of due process, which affords little protection from significant reductions in benefits as a result of legislative action. See United States v. Locke, 471 U.S. 84, 108 , 105 S.Ct. 1785, 1799 , 85 L.Ed.2d 64 (1985) (stating that, “in altering substantive rights through enactment of rules of general applicability, a legislature generally provides constitutionally adequate process simply by enacting the statute, publishing it, and, to the extent the statute regulates private conduct, affording those within the State’s reach a reasonable opportunity both to familiarize themselves with the general requirements imposed and to comply”); Atkins v. Parker, 472 U.S. 115, 130 , 105 S.Ct. 2520, 2529 , 86 L.Ed.2d 81 (1985) (holding that food stamp benefits in which plaintiffs claimed a property inter *520 est could be reduced or altered through the normal legislative process). The advantages of the view that public employees have merely a property interest in their pension benefits are achieved at the expense of ignoring and defeating the legitimate expectations and the contractual rights of public employees.

The Court fails to recognize that the pension benefits of plaintiffs constitute deferred compensation for their current service. Although no express contract for pension benefits exists, the statutes and the historical record give rise to an implied contract requiring the State to discharge its obligation to pay deferred compensation by providing pension benefits. The pension benefits constitute payment for work already performed. The State’s ability to pay this deferred compensation in the future is assured by the employees’ contributions and the State’s obligation to annually contribute to the pension fund. “[T]he mere fact that performance is in whole or in part dependent upon certain contingencies does not prevent a contract from arising, and the employing governmental body may not deny or impair the contingent liability any more than it can refuse to make the salary payments which are immediately due.” Kern v. City of Long Beach, 29 Cal.2d 848 , 179 P.2d 799, 803 (1947). By providing their services and deferring compensation, plaintiffs acquired contractual rights to a pension conditioned upon remaining in state employment for the required length of time. See Betts v. Bd. of Admin. of Public Employee Retirement Sys., 21 Cal.3d 859 , 148 Cal.Rptr. 158, 161 , 582 P.2d 614, 617 (1978); see also Restatement (Second) of Contracts § 45 (1979). Although the State is free to discharge employees in times of financial stress and although it may retain the right to substitute benefits of equal value, the statutory scheme implicitly obligates the State to maintain the level of benefits resulting from the contributions of the employees and the State as long as the employment continues. See Betts v. Bd. of Admin. of Public Employee Retirement Sys., 148 Cal.Rptr. at 161 , 582 P.2d at 617 .

The appropriate constitutional analysis therefore begins with the question whether the statutory modifications to the pension plan substantially impaired the contractual relationship between plaintiffs and the State. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411 , 103 S.Ct. 697, 704 , 74 L.Ed.2d 569 (1983). The United States Supreme Court has measured the severity of the impairment “by the factors that reflect the high value the Framers placed on the protection of private contracts. Contracts enable individuals to order their personal and business affairs according to their particular needs and interests.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 , 98 S.Ct. 2716, 2723 , 57 L.Ed.2d 727 (1978). Therefore, total destruction of contractual expectations is not required for a finding of substantial impairment, and state regulation restricting a party to gains reasonably expected does not necessarily constitute substantial impairment. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. at 411 , 103 S.Ct. at 704 .

Other courts have found substantial impairment from legislation that increases the minimum age at which retirement benefits may be paid, Christensen v. Minneapolis Mun. Employees Retirement Bd., 331 N.W.2d 740, 751 (Minn.1983); that requires state employees to take unpaid leave, Opinion of the Justices, 135 N.H. 625 , 609 A.2d 1204, 1210 (1992); that defers employees’ pay, Assoc, of Surrogates and Supreme Court Reporters v. State of New York, 940 F.2d 766, 772 (2d Cir.1991); and that doubles employee contributions to a pension plan without an increase in benefits, Singer v. City of Topeka, 227 Kan. 356 , 607 P.2d 467, 476 (1980). In the present case, the Superior Court correctly ruled that the reductions of benefits resulting from the modifications constitute a substantial impairment of plaintiffs’ contractual rights.

The State may yet exercise its police powers and impair the contractual relationship if it has a significant and legitimate public purpose. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. at 411-12 , 103 S.Ct. at 704 . That *521 purpose can be to remedy “a broad and general social or economic problem.” Id. The State’s goal of reducing expenditures at a time of fiscal distress is both a significant and a legitimate public purpose. See Christensen v. Minneapolis Mun. Employees Retirement Bd., 331 N.W.2d at 751 .

Because the State is modifying its own contractual relationship, however, the modifications are subject to special scrutiny, and the Court should require a demonstration that they are reasonable and necessary to the State’s purpose. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. at 411 n. 12, 103 S.Ct. at 704 n. 12; United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 25-26 , 97 S.Ct. 1505, 1519 , 52 L.Ed.2d 92 (1977). Necessity is assessed by examining whether a less drastic modification or alternative would have achieved the public purpose. Reasonableness is assessed by considering the circumstances and determining the degree to which the problem could have been anticipated. United States Trust Co. of New York v. New Jersey, 431 U.S. at 31-32 , 97 S.Ct. at 1522 .

The State has not demonstrated the necessity for impairing the contractual rights of plaintiffs in its choice among alternatives to close the gap between revenues and expenses. When dealing with a general deficit in the State’s budget, the contract clauses of both the state and federal constitutions limit the State’s ability to impair the obligations of its own contracts without resorting to more drastic reductions of non-contractual expenditures or to increasing revenues. The choice to impair contractual rights is not an equal choice among other policy alternatives. “A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.” United States Trust Co. of New York v. New Jersey, 431 U.S. at 26 , 97 S.Ct. at 1519 . This case illustrates the truth of that principle. We need not assess the reasonableness of the modifications because m our judgment the State has failed to demonstrate that the impairment of its contractual relationship with plaintiffs was necessary. Consequently, the modifications violated the contract clauses of both the Maine and United States constitutions. We would affirm the Superior Court.

. Legislative intent is stated as follows:

It is the intent of the Legislature to encourage qualified persons to seek public employment and to continue in public employment during their productive years. It is further the intent of the Legislature to assist these persons in making provision for their retirement years by establishing benefits reasonably related to their highest earnings and years of service and by providing suitable disability and death benefits.

5 M.R.S.A. § 17050 (1989).

. The Legislature finds that the State owes a great debt to its retired employees for their years of faithful and productive service.

(A.) Part of that debt is repaid by the benefits provided to retirees through the Maine State Retirement System.

(B.) Retirees, who depend heavily on these benefits, and current employees, who will one day retire and receive benefits, are concerned about the financial viability of the retirement system.

5 M.R.S.A. § 17151(1) (1989).

.Payments of compensation to a member, minus the adjustment to compensation resulting from a deduction or employer pick-up contributions under this section, shall be a complete discharge of all claims and demands based on services rendered by the member during the period covered by the payment, except for any claims or demands for the benefits provided under this Part.

5 M.R.S.A. § 17203(4) (1989).

. There is no United States Supreme Court case standing for the proposition that public pension plans of the form at issue here do not constitute a contractual relationship. This Court notes parenthetically a finding by the United States Supreme Court in U.S.R.R. Retirement Bd. v. Fritz, 449 U.S. 166, 174 , 101 S.Ct. 453, 459 , 66 L.Ed.2d 368 (1980), that railroad retirement benefits, like social security benefits, are not contractual and may be altered. The basis of that conclusion, however, was the indirect incorporation into the Railroad Retirement Act of a provision in the Social Security Act reserving to Congress the power to alter or repeal benefits. Hisquierdo v. Hisquierdo, 439 U.S. 572 , 575 n. 6, 99 S.Ct. 802 , 805 n. 6, 59 L.Ed.2d 1 (1979).