Opposition Brief — Maryland State Teachers Ass'n v. Hughes

No. 85-1465 ~~ eee tonite

E D

APR & 1988

£33 PH F. SPANIOL, JR,

Supreme Court of the United $ ategsccrk

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In THE

OctoBer TERM, 1985

MARYLAND STATE TEACHERS ASSOCIATION, INC., er At.,

Petitioners,

Wi

HARRY HUGHES, GOVERNOR OF MARYLAND, er At.,

Respondents.

On PETITION FOR WRIT OF CERTIORARI TO THE

Unirep States Court oF APPEALS

FOR THE FourtH CIRCUIT

BRIEF IN OPPOSITION

SrepHen H. Sacus,

Attorney General of Maryland,

Diana G. Morz,

Susan K. Gavuvey,

Linpa H. LaMong,

Caro S. Sucar,

KaTuryn M. Rowe,

Rosert A. ZARNOCH,

(Counsel of Record),

Assistant Attorneys General,

90 State Circle,

Annapolis, Maryland 21401,

(301) 841-3889,

Attorneys for Respondents.

The Daily Record Co., Baltimore, MD 21202 aa

QUESTIONS PRESENTED

1. Whether public employees and teachers could rea-

sonably and legitimately rely upon a purported statutory

contract of “no change” in certain future pension benefits,

where the pre-existing Maryland caselaw and other

relevant “law of the place” incorporated into the alleged

contract permitted legislative change and the area of

pension costs and benefits continued to remain pervasively

regulated and heavily troubled?

2. Whether Maryland’s pension law changes could be

deemed a severe and retroactive contract impairment,

even though the Legislature did not affect prior earned

benefits or most future benefits of employees and teachers,

who, in fact, were compensated by pay increases that

translated into higher pension benefits and by improve-

ments to the integrity, flexibility and actuarial and fiscal

soundness of the retirement systems?

3. If the statute is found to severely and retroactively

impair a purely financial obligation outside the State’s

reserve powers, whether the legislation is nevertheless

justified as reasonable and necessary to insure the

stability of the retirement systems and the State’s fiscal

health?

4. Whether the judgment below should be affirmed on

the alternative grounds (1) that no binding statutory

contract was created; (2) that the employees and teachers

furnished no consideration for a contract; (3) that the

alleged contract was subject to a condition of reasonable

containment of rising pension costs, a condition that, by

1984, had failed as a result of unforeseen developments;

and (4) that the Petitioners were justly compensated for

the impact of pension law changes?

il

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED ............csssssssessescsseeesseceseneens i

Rexenieeen om Cet COAG sciiieesiacawssccrsteneceaeneen 1

ARGUMENT:

I. No Substantial Federal Question Is

Presented By The Lower Court’s Deci-

sion That The Maryland Caselaw That

Formed Part Of The Purported Stat-

utory Contract Permitted The Legis-

lative Modifications At Issue ................ 11

II. The Decisions Below Are Fully Con-

sistent With Cases Of This Court And

Are Not In Conflict With Holdings In

Any Federal Circuit Or The Highest

Garant OF Amy BRR vscicscciniacestetnences 17

III. No Substantial Federal Question Is

Raised As To Whether As A Factual

Matter Petitioners’ Pension Contract

Was Impaired Or Whether The State

Factually Justified The Need For

Changes In Maryland Pension Lav ..... 21

CONCLUSION ........ a ee eee 25

TABLE OF AUTHORITIES

Cases

Allen v. Bd. of Adm. Publ. Emp., 104 S. Ct.

BOGS CIGD eiivnisicsstcincssscassmssrceaponeeeauenenn 14, 20

Association of Pennsylvania State College

and University Faculty v. State System of

Higher Educatien, 479 A.2d 962 (Pa. 1984) 13

Baker v. Baltimore County, 487 F. Supp. 461

(D. Md. 1980) aff'd 660 F.2d 488 (4th Cir.

BED scsicecncnssiccasccenissnsccseocancnsnexbaaienukeaiunen anaes 15, 22

ii

PAGE

Bishop v. Wood, 426 U.S. 341 (1976) .................. 16

Butler v. Pennsylvania, 10 How. 400 (1851) ...... 18

Christensen v. Minneapolis Municipal Em-

ployees Retirement Board, 331 N.W.2d 740

Fee ed iia ccnk ssi bisanenttonsusetscesasexennes 12

City of Frederick v. Quinn, 35 Md. App. 626,

sac asiznsesibsasonncesniens 3, 10, 12,15

Crenshaw v. United States, 134 U.S. 99

SSE SEI LOO RO 18

Creps v. Board of Firemen’s Relief and

Retirement Fund Trustees, 456 S.W.2d 434

SR I, BUD OUED cn scscescnsasnesnacescianssscavsnsesces 12

Dodge v. Board of Education, 302 U.S. 74

ED, Aas csnsub beauhdddnbeeasnacsdananconceceses 14

Ennis Water Works v. Ennis, 233 U.S. 652

Tee ss cacussasesenesenes il

Hall! v. Wisconsin, 103 U.S. 5 (1880) .......0000000.. 18

Houghton v. City of Long Beach, 330 P.2d

EEE SSE COR 13

Illinois Fed. of Teachers v. faie 326

N.E.2d 729 (Ill. 1975), cert. denied, 423 U.S.

Tee cis ovinineainvakaneesesenene 13

In re Enrolled Senate Bill 1269, 209 N.W.2d

RE EES 13, 21

Local Div. 589, etc. v. Comm. of Mass., 666

F.2d 618 (1st Cir. 1981), cert. denied, 457 U.S.

Nee id ccicheunnscdneeeesesvaness 19

Lyon v. Flouring, 76 Cal. Rptr. 869 (Cal. App.

1969), appeal dismissed for want of a sub-

stantial federal question, 396 U.S. 274 (1970) 13, 14, 20

McFeely v. Pension Comm’n, 73 A.2d 757

i cinikscpneeinsturpnvevassnensuvussencsss

13

Minneapolis Police Relief Association v.

Sundquist, 104 S. Ct. 1902 (1984) .............. 14, 20

MSTA v. Hughes, _— F.2d __, No. 84-2213

CR a ec le PIED «clas scadisconasaackicuetuadcesincnion passim

MSTA v. Hughes, 594 F. Supp. 1353 (D. Md.

SY secre euicacecetoeeapcdiatesaaeanaidiedanncntaaiatasabba bites passim

Newton v. Mahoning County, 100 U.S. 548

‘L-, SRRaNnle- ROORER HE Sec Ie Seo ene Semen IN at men 18

Pasadena Pol. Off. Ass’n v. City of Pasadena,

195 Cal. Rptr. 339 (Cal. App. 1983) .............. 13

Pennie v. Reis, 132 U.S. 464 (1869) ..............0.. 20

Pineman v. Oechslin, 488 A.2d 803 (Conn.

MAY :iisckasinnhucnitniocthadadipedhitalelsshampbicalaniaisleauasababixes 12

Smith v. City of Dothan, 188 So. 2d 532 (Ala

Bc cn sce cach tas Ll alsant aeeecatummintamaubensanasn 13

United States Trust Co v. New Jersey, 431

ED: ciivncascctsashasbictanidesinmaadasiennnsss inet 11,18

United States v. Teller, 107 U.S. 64 (1883) ....... 20

Valdez v. Cory, 189 Cal. Rptr. 212 (Cal. App.

UY 5st caal bicdanas dampens naasomaddamalinlamaiaacete 13

Von Hoffman v. City of Quincy, 4 Wall. 535

SS said Liensccickcdeasdlace iaeccucidaadabseaeaunteinaacabbiccuntonetic 11

Yeazell v. Copins, 402 P.2d 541 (Ariz. 1965) ..... 12

Zucker v. United States, 758 F.2d 637 (Fed.

Cir. 1985), cert. denied, 106 S. Ct. 129 (1985) 12

Constitutional Provisions and Statutes

U.S. Constitution, Article 1, Section 10,

a ai eae irs saclgustnieesseasenaeianars passim

Md. Code Ann.:

Art. 73B, §§ 1(15) and 81(15) ....... eee 8

SL Ae RINNE. Se casecierntseckeccesncsbnbntarannsdceannsanas 23

PAGE

1984 Md. Laws:

I i 8, 9,11, 22

oa a a aaa 8, 11, 24

1979 Md. Laws:

RIA el trahsalses shiciecscnlieabcatceseigheiyhciooeanbblisahamapebies clasctaekcs 1, 3, 22

aS ea GEG ER Ce CT a ae 1, 3, 22

SIE I TI TD sieiticsncininniinniraierarnnnabiinentiavoiani 7

Miscellaneous

61 Opinions of the Attorney General 746

REET incest inh enisdesiniladiaabicnesenidbbdiaditiabeiinascelacaeitupesianiass 3

1979 House Journal 1385-1413 0.0.0.0... 4,5

Report of Joint Legislative and Executive

COMINIURO GRR FRIIIID on ccsiinsicncececccssncssnnacecesss. 6, 7,8

Executive Order 01.01.1983.10 oo.....cccccccceceeeeee 7

Hale, “The Supreme Court and the Contract

Clause: IIT’, 57 Harv. L. Rev. 852 (1944) ..... 16

No. 85-1465

In THE

Supreme Court of the United States

OctToser TERM, 1985

—\

=e

MARYLAND STATE TEACHERS ASSOCIATION, INC., er At.,

Petitioners,

V.

HARRY HUGHES, GOVERNOR OF MARYLAND, et At.,

Respondents.

On Petition For Writ oF CERTIORARI TO THE

Unirep States Court or APPEALS

FOR THE FourtH Circuit

BRIEF IN OPPOSITION

Governor Harry Hughes, et al., Respondents, for reasons

detailed herein, urge the Court to deny issuance of a writ

of certiorari to the United States Court of Appeals for the

Fourth Circuit to review the judgment in MSTA ov.

Hughes, F.2d , No. 84-2213 (4th Cir. Dec. 5, 1985).

STATEMENT OF THE CASE

After years of study and of employee opposition to

pension reform, the Maryland Genera! Assembly in 1979

enacted comprehensive legislation in an attempt to control

the runaway costs of the State Employees’ and Teachers’

Retirement Systems. Chapters 23 and 24, Laws of

Maryland (1979). This statute (1) required advance-

funding of future State pension liabilities; (2) established

2

for employees and teachers hired after December 31, 1979,

a generally noncontributory “pension” system with a

modified benefit schem :, including a capped cost-of-living

adjustment (COLA), and with integration of benefits with

social security; and (3) sought to encourage transfers to

the new system by “retirement” system members via a

return of contributions.’

When the 1979 legislation was being considered by

House and Senate Committees, public employee unions

sought amendments in an attempt to assure their

membership that no future changes to benefit plans of old

system members would occur. Before voting to approve the

amendments, the Committees sought advice from the

State Attorney General’s Office that the proposals would

not preclude future legislative changes, including modi-

' As was the case prior to 1979, members of the State

employees’ and teachers’ “retirement” systems (including em-

ployees of participating municipal corporations) contributed five

percent or less of their salary to an “annuity” which, coupled

with the totally State-funded “pension”, formed their “re-

tirement allowance.” See Article 73B, § 1(16), (17), and (18), and

§ 81/16), (17), and (18). Eligibility for service retirement was

obtained upon 30 years of service or at age 60 and a right to

some retirement allowance “vested” upon five years service. Art.

73B, §11(16) and §86(10). That retirement allowance was

computed by multiplying Yssen (1.82 percent) of the member's

“average final compensation” (his or her three highest salary

years) by the number of years of creditable service. Special

provisions also existed in the law as to death and disability

benefits as well as an automatic, unlimited cost-of-living

adjustment for retirees. Prior to 1969, the employee-funded

“annuity” and the State-funded “pension” were set at equal

amounts. For example, when the percentage applied to average

final compensation was roth (1.43 percent), that amount was

based upon a “isorn share from both the State and the member.

However, since 1969, the employee’s share remained at 11 40th,

while the State provided additional funds in the budget for the

employee’s share as an “additional pension.” In addition, since

its inception in 1971, the COLA has been funded entirely by the

State from appropriated funds, not by a member’s contributions.

JLEC Report at 26.

3

fication of the unlimited COLA. On February 22, 1979, the

General Assembly’s lawyer responded in writing by

pointing to a 1976 Opinion of the Attorney General (61

Opinions of the Attorney General 746 (1976)), sanctioning

even more stringent proposals, ard the Court of Special

Appeals opinion in City of Frederick v. Quinn, 35 Md. App.

626, 371 A.2d 724 (4977), on the legislative right to alter

municipal pension plans. On the basis of this authority,

the letter concluded that even earned pension benefits

were subject to a reserved legislative power to make

reasonable modifications “for the purpose of keeping the

system flexible and maintaining its integrity” and that

“this rule would also apply to legislative changes affecting

cost-of-living adjustments, regardless of when the em-

ployee retires.” As to future pension earnings, the letter

noted that “the Legislature could modify such pension

rights before they become a vested property right without

regard to justifications rooted in fiscal integrity or

reasonable modifications.” See MSTA v. Hughes, 594 F.

Supp. 1353, 1364 (D. Md. 1984).

Following the receipt of this advice, House and Senate

committees adopted the amendments proposed by the

unions, which provided that members of the old re-

tirement systems, as of December 31, 1979, who did not

join the new pension system, would remain in the old

system “as a condition of that person’s employment

contract . . . without change in. . . benefits.”* Despite

* The amendment, which amounted to less than two pages of

a 80-page bill, went on to provide that the relevant benefits

included: (1) The eligibility for service retirement upon com-

pletion of 30 years service or attainment of age 60; (b) The

eligibility for a reduced service retirement upon completion of a

certain length of service; (c) The service retirement allowance of

one fifty-fifth of average final compensation; (d) The retirement

allowance provided for ordinary or accidental disability; (e) The

selection of options for service or disability allowance; (f) The

adjustment of the retirement allowance for increases in the

consumer price index; (g) The death benefit; (h) The level of

contributions from members; and (i) The length of service for

members to vest benefits in the system.

4

the amendments, union opposition to the measure per-

sisted. However the legislation was enacted.

Spread across the legislative record and included in

reports, fiscal notes and actuarial analyses were the 1979

General Assembly’s hopes for pension reform and its

reasonable expectations as to future Svate costs, transfers

into the new system, inflation, and the non-precipitous

growth of unfunded accrued pension liabilities. See 1979

House Journal 1385-1413. For example, a “fiscal note”

prepared for the legislation® disclosed that total costs of all

the retirement and pension systems as a percentage of

payroll would level off at 11.66 percent and continue at

that rate through the year 2020 and that dollar costs

would range from $254.3 million in Fiscal 1981, to $345.8

million by fiscal year 1985. 1979 House Journal 1398.

Additional annual costs as a result of the legislation were

forecast at $32.1 million for fiscal year 1981 up to $35.9

million in the mid-eighties, with a drop in net costs

occurring sometime before the year 2000. Jd. It was also

forecast that the unfunded accrued liability of the systems,

which, as of June 30, 1978, valuation stood at $2.8 billion,

1979 House Journal at 1412, would not reach $5 billion

until the year 2000. According to the fiscal notes, “[a] key

assumption used in the actuarial analysis is that ap-

proximately 40 percent of the present membership in the

Employees and Teachers Pension Systems will elect to

transfer to the new systems.” 594 F. Supp. at 1365. With

the stability forecast in these figures, it was no wonder

that the Governor in his end-of-session message to the

1979 General Assembly could say that “by reforming a

runaway State pension system,” what we have accom-

3 Pension bills are ordinarily required by law to contain a

fiscal note containing ai estimate of the fiscal impact and an

actuarial analysis of tue legislation. See Md. Code, State

Government Article, § 2-1505. Generally, a vote may not be

taken on such legislation by a standing committee without a

fiscal and actuarial analysis. Jd.

5

plished “is to begin the process of laying a foundation for

sound fiscal planning and management for the years to

come.” 1979 House Journal at 3953.4

These expectations were soon dashed. First, as State

officials advised New York bond rating houses of the new

stability of the Maryland retirement systems, public

employee unions began a successful campaign to keep old

system members from transferring into the new system.

As a result, only 18 percent of teachers and 32 percent of

State employees opted for the new system. 594 F. Supp. at

1365.

Second, a 1980 “experience investigation” by the State’s

actuary of the teachers’ retirement system disclosed that

certain actuarial assumptions embodied in the 1979 cost

projections were incorrect and that teachers were retiring

earlier in greater numbers to obtain the unlimited COLA.

This necessitated an increase in the State’s contribution of

3.42 percent of payroll phased in over a three-year period.

594 F. Supp. at 1365.

Third, because of a drafting error in the 1979 legislation

and because of the different demographic characteristics of

their workforce, municipal corporations participating in

the State retirement system suddenly faced millions of

dollars more in unexpected costs. And a moratorium had

to be imposed administratively on municipality payments

to the system. 594 F. Supp. at 1366.

Fourth, in 1981, the State’s actuary advised that the

1979 projection of costs erroneously computed the COLA

for retirement system members on a simple rather than a

compound basis. 594 F. Supp. at 1366. The error was not

* Shortly after the legislation was enacted and before it took

effect, the General Assembly took the additional step of

establishing a Joint Committee on Pensions “to continue the

study of pension reform and to propose necessary future

legislation.”

6

just a one-year problem. It essentially required more than

a $30 million increase in the 1983 fiscal year State budget

and comparable amounts for State advance funding of

pension costs for the next 40 years, or an estimated $1.2

billion. Jd. at n.7. Unfunded accrued liabilities for the

systems for a single year immediately increased by $578

million. Id. In addition, $16 million in higher appropri-

ations had to be found in the 1982-83 budget to pay for

these costs, thereby causing a cut-back in anticipated

State spending for social welfare.

Further aggravating the COLA problem was a totally

unexpected and drastic increase in inflation. On the basis

of the Labor Department CPI, retirees received increases

of 11.3 percent in 1981, 13.5 percent in fisca! 1982, and

10.4 percent in fiscal 1983.° Report of Joint Legislative

and Executive Committee on Pensions (JLEC Report) at

27. These were increases that dwarfed the actuary’s

reasonable (and present) assumption of five percent and

generated an enormous actuarial loss, escalation of

unfunded accrued liabilities, and higher annual appropri-

ations for pension costs. The end result of these develop-

ments was a quarter of a billion dollar difference between

1979 projected State costs and actual costs as of fiscal year

1984. Unfunded accrued liabilities exceeded $5 billion,

JLEC Report at 63 — almost 20 years earlier than

anticipated.® In December 1982, the State was told by its

> When the “two-tiered” pension system proposal was taking

shape in the Genera! Assembly in the late seventies, inflation

was at a moderate rate. Although the cost-of-living rose in 1979

when the pension reform legislation was being enacted, various

economists and even the President were forecasting a reduction

in inflation. See e.g. 1979 Public Papers of President Jimmy

Carter, News Conference of Feb. 12, 1979 at 156.

® State unfunded accrued liabilities per active member rose

from $19,831 in 1980 to $34,512 in 1983. JLEC Report at 67. In

addition, by 1983, Maryland ranked second in the Nation with a

per capita unfunded pension liability burden of $1,256.82 —

higher than the per capita tax burden, the per capita State debt

burden, or per capita State expenditures. See Prudential-Bache

a

actuary that an additional $103 million in appropriations

was needed to fund the various retirement and pension

systems in fiscal year 1984. JLEC Report at 55. As a

result, the Governor announced that there would be no

State employee pay increase that year and less money for

social services and other programs. In addition, agency

- spending cuts were ordered.

The very next session, Senate Bill 606, which would

have computed future years’ benefits for employees and

teachers in the old system in accordance with the new

system formula (including a three percent COLA), was

introduced and was passed in the Senate over union

opposition. However, the House refused to act upon the

bill, claiming that the issue deserved further study and

that pension changes should not occur without an

employee pay increase. After the failure of Senate Bill

606, the Governor named a Joint Legislative and Execu-

tive Committee on Pensions (“JLEC”), composed of

legislative veterans of past pension reform efforts and

certain executive branch officials, as well as an advisory

body consisting of members of the employees’ unions, to

address a wide range of pension reform and cost con-

tainment issues. Executive Order 01.01.1983.10. Before

the JLEC issued its recommendations, members of the

House suggested and the Committee adopted a compro-

mise of the 1983 legislation — a “menu” of options for old

system members (none of which affected existing retirees),

including a two percent increase in employee con-

tributions that would preserve all benefits including an

unlimited COLA.’

Securities, A Special Report: The Fifty States — Financial

Condition and Economic Outlook (Sept. 1983) at 50-51.

7 Under the “menu” approach, old system members were

offered four choices: (1) the “bifurcated” option embodied in

Senate Bill 606 of 1983, viz., preservation of all prior years’

benefits already earned under the old system with future years

computed under the new, noncontributory system; (2) continued

8

In addition to the COLA legislation (H.B. 991, enacted

into law as Chapter 7, 1979 Laws of Maryland), the J LEC

proposed a number of additional reforms clearly designed

to benefit employees. JLEC Report at 1. Tnese included

removing certain pension fund investment limitations,

using contributions from the new systems to insure the

solvency of the old, changing the actuarial cost method to

stabilize future funding and extending a moratorium on

the accrued liability payments of local governments

participating in the State systems. (H.B. 1664, enacted

into law as Chapter 290, 1984 Laws of Maryland). The

Administration proposed this comprehensive pension

reform package along with a six percent pay raise for

State employees and a five-year commitment of State

spending for education. A large portion of the latter was

clearly intended for teacher salary increases that by

operation of law acted to raise pension benefit levels. See

Md. Code, Art. 73B, § 1(15) and §81(15). Despite intense

opposition by teachers and employees House Bill 991 was

enacted, clearing the way for passage of House Bill 1664

and these pay initiatives.®

On April 10, 1984, six employee unions and 19 teachers

and public employees brought a class action in the United

States District Court in Maryland challenging only one

contribution of five percent with a five percent COLA cap; (3)

retention of the unlimited COLA but an additional contribution

of two percent; and (4) transfer to the new system with a refund

of contributions. If a member failed to make any choice by the

cut-off date, his or her benefits would automatically be

bifurcated. Just as was the case under Senate Bill 606, the

“menu” approach did not affect the benefits of those who retired

before the effective date of the legislation.

8 Before passage, the bill was amended in ways designed to

additionally benefit the members of the system. One amend-

ment required the savings from the first year to be applied to

the unfunded accrued liability. A second amendment increased

the interest paid on the return of contributions to members who

chose to transfer to the pension systems.

9

component of this pension reform and salary enhancement

package for State employees and teachers, viz. House Bill

991. Their principal contention was that the bill uncon-

stitutionally impaired a contract purportedly created in

1979. In return for agreement to an expedited schedule,

and, if the State prevailed, post-judgment implementation

of the statute in accordance with its July 1, 1984 effective

date, the State consented to the entry of a preliminary

injunction halting operation of the law. Cross motions for

summary judgment were filed and following argument,

the Court, in a September 17, 1984 order, granted the

State’s motion. On September 25, 1984, the Court issued

an opinion which concluded that if a contract had been

created in 1979, it was not impaired by the 1984

legislation. MSTA v. Hughes, 594 F. Supp. 1353 (D. Md.

1984). Apparently, to avoid reconciling Maryland court

decisions that undercut the existence of a statutory

contract of “no change” in State pension benefits,’ with a

* In Mazor v. Dept. of Corrections, 30 Md. App. 394, 352 A.2d

918 (1976), aff'd 279 Md. 355, 369 A.2d 82 (1977), the Court of

Special Appeals of Maryland held that because of the clear

distinction in Article 73B of the Maryland Code between a State

funded “pension” and an “annuity” based on employee con-

tributions, a State pension was a gratuity not a contract, even in

the face of statutory language making a pension and an annuity

“obligations of the State.” The State’s highest court affirmed.

Relying upon Flemming v. Nestor, 363 U.S. 603 (1960), the

judges noted:

“To engraft upon the pension . . . program. . . a concept

of accrued property rights would deprive these programs of

the ‘flexibility and boldness in adjustment to ever-changing

conditions’ which they demand.” 279 Md. at 366, 369 A.2d

at 90.

Other Maryland cases also cast doubt on Petitioners’ statutory

contract, of “no change” in benefits, viz., Westminster Water Co.

v. Westminster, 98 Md. 551, 56 A. 99 (1904) (A permanent

contract binding legislative powers is ultra vires); Kimball-Tyler

v. Baltimore City, 214 Md. 86, 133 A.2d 433 (1957) (Detrimental

reliance is insufficient consideration to support a statutory

contract); Canal Co. v. Rail Road Co., 4 G. & J 1 (1832) (Use of

word “contract” is irrelevant on whether a contract exists); and

10

1977 intermediate appellate court decision that concluded

that a municipal pension was a contract protecting earned

benefits but one subject to a reserved legislative power to

change, City of Frederick v. Quinn, 35 Md. App. 626, 371

A.2d 724 (1977), the District Court assumed “without

deciding” that a contract existed, MSTA v. Hughes, supra,

594 F. Supp. at 1362. Incorporating Quinn into the

employees’ and teachers’ asserted contract, the Court held

that it was subject to legislative change and protected no

more than pro rata earned benefits. In light of this latter

feature of the contract, the Court concluded the 1984

statute resulted in neither a retroactive nor a severe

impairment. 594 F. Supp. at 1362-1364.'° The Court also

stated that if the employees’ and teachers’ contract of no

change was immutable, the State would have surrendered

an essential attribute of State sovereignty, viz. control

over compensation for future services. 594 F. Supp. at

1362 and 1364. However, the Court added that “the

plaintiffs, presumably recognizing the preposterousness of

a position that a contract of this type is irrevocable, admit

that the contract asserted to exist here may be altered.”

Rittenhouse v. Baltimore, 25 Md. 336, 346 (1886) (No contract

obligation arises from those acts “necessarily connected with or

growing out of [the governmental entity’s] public capacity.”).

10 The Court also found no severe impairment as a factual

matter. It specifically rejected Petitioners’ contentions that the

“menu” option increasing the coniribution rate from five to

seven percent resulted in a 40 percent rate increase. Quoting

from the affidavit of the State’s actuarial expert, the Court said:

“Past contributions made by the affected members are not

adjusted; for example, a member who has already con-

tributed to the Retirement System at 5% for twenty-five

years and has five years to go would only contribute an

additional 12% (rather than 40%) in total contributions.”

594 F. Supp. at 1364.

The Court also emphasized the conclusions of the State’s actuary

that using the methodology and assumptions of Petitioners’

expert, “the ‘worst case scenario’ of the 7% option results in a

maximum benefit loss of well under two percent for any current

member of the Retirement Systems.” /d.

11

594 F. Supp. at 1362. Finally, the Court concluded that

even if the impairment were substantial, the 1984 pension

reform legislation was reasonable and necessary to serve

important public purposes, such as enhancing the actua-

rial soundness of the retirement systems, the pre-

dictability of its costs, and State planning of its fiscal

strategies. Jd. at 1369-1370.'' On December 5, 1985, the

United States Court of Appeals for the Fourth Circuit

affirmed in a brief per curiam opinion, with all judges in

agreement that the State had acted in good faith and had

justified the need for pension law changes. See concurring

opinion of Judge Murnaghan. See Petition for Writ of

Certiorari at 5a-6a.

ARGUMENT

I.

NO SUBSTANTIAL FEDERAL QUESTION IS PRESENTED BY THE

LOWER COURT’S DECISION THAT THE MARYLAND CASELAW

THAT FORMED PART OF THE PURPORTED STATUTORY CON.-

TRACT PERMITTED THE LEGISLATIVE MODIFICATIONS AT ISSUE.

This Court has long held that in determining the

existence and extent of a statutory contract alleged to be

protected by Article I, §10 of the United States Con-

stitution, it “will treat it as if there was embodied in their

text the settled rule of law which existed in the state at

the time the state action relied upon as a contract was

taken.” Ennis Water Works v. Ennis, 233 U.S. 652,

657-658 (1914); see also United States Trust Co. v. New

Jersey, 431 U.S. 1, 19, n.17 (1977); Von Hoffman v. City of

Quincy, 4 Wall. 535, 550 (1867). Although the petition for

11 Following the District Court decision, the State announced

plans to implement the 1984 law with a six-month election

period beginning November 11 1984, and to return old system

members to the status quo should it not prevail on appeal. Upon

representation of this arrangement to the Court, the District

Judge denied Petitioners’ request for a stay. Thus, the 1984

legislation has been in effect for nearly 18 months.

12

certiorari gives little hint of it, this principle, along with

the strong factual justification offered by the State in

support of the 1984 pension law changes, determined the

outcome below. In short, Maryland caselaw, most notably,

City of Frederick v. Quinn, 35 Md. App. 626, 371 A.2d 724

(1977), permitted legislative modification of a pension

“contract” in Maryland and sanctioned the statutory

changes attacked by Petitioners.**

The state common law governing public employee

pension rights and the legislative power to alter benefits

varies from jurisdiction to jurisdiction. Some state courts

cling to the notion that a public employee pension is not a _

contract but a gratuity that can be altered at the

Legislature’s will. See e.g., Creps v. Board of Firemen’s

Relief and Retirement Fund Trustees, 456 S.W.2d 434

(Tex. Civ. App. 1970). However, in contrast to the

treatment of federal retirees, see Zucker v. United States,

758 F.2d 637 (Fed. Cir. 1985), cert. denied, 106 S. Ct. 129

(1985), the clear trend of state court decisions is to offer

some measure of protection for employee pension rights. A

few courts hold that pensions are contractual in the sense

that rights vest unconditionally and may not be legis-

latively altered even to make plans more fiscally sound.

See e.g., Yeazell v. Copins, 402 P.2d 541 (Ariz. 1965).

Others reject this rigid “contract” approach in favor of

treating pensions as a “property right,” see e.g., Pineman

v. Oechslin, 488 A.2d 803 (Conn. 1985) or as governed by a

theory of “promissory estoppel,” Christensen v. Min-

neapolis Municipal Employees Retirement Board, 331

N.W.2d 740 (Minn. 1983). A growing number of jurisdic-

tions characterize a pension as a contract, but one

permitting only limited vesting rights and containing an

'2 In addition to the Maryland cases, various provisions of the

Maryland Constitution and statutes undercut the Petitioners’

ability to rely on a contract of no-change in future benefits. See

n.16, supra.

13

implied term reserving legislative power to make reason-

able modifications. See e.g., Lyon v. Flouring, 76 Cal. Rptr.

869 (Cal. App. 1969), appeal dismissed for want of a

substantial federal question, 396 U.S. 274 (1970).}%

Even those state courts that treat a public employee

pension as a contract or subject to reasonable modification

differ as to what rights are protected by the contract and

what modifications are permitted. For example, some state

courts permit an increase in employee contributions, see

e.g., Houghton v. City of Long Beach, 330 P.2d 918 (Cal.

App. 1958); others do not, Association of Pennsylvania

State College and University Faculty v. State System of

Higher Education, 479 A.2d 962 (Pa. 1984). Some

jurisdictions protect only accrued or earned benefits, see

e.g., In re Enrolled Senate Bill 1269, 209 N.W.2d 200

(Mich. 1973); others protect some future benefits, Pas-

adena Pol. Off. Ass’n v. City of Pasadena, 195 Cal. Rptr.

339 (Cal. App. 1983). Some courts hold that a pension

contract does not prevent reduction of appropriations for

such plans, see e.g., Illinois Fed. of Teachers v. Lindberg,

326 N.E.2d 749 (Ill. 1975), cert. denied, 423 U.S. 839

(1975); others reach an opposite conclusion, see Valdez v.

Cory, 189 Cal. Rptr. 212 (Cal. App. 1983). Some say there

are no pension rights until al! eligibility requirements,

including years of service, are satisfied, McFeely uv.

Pension Comm’n, 73 A.2d 757 (N.J. Super. 1950); others

hold that rights vest upon employment, Smith v. City of

Dothan, 188 So. 2d 532 (Ala. 1966).'*

’

'S The apparent forerunner of the “reasonable modification’

approach can be found in this Court’s decisions on the

amendment of corporate charters. See Shields v. Ohio, 95 US.

319, 324-25 (1877) (“The power of alteration and amendment is

not without limit. The alterations must be reasonable; they

must be made in good faith, and be consistent with the scope

and object of the Act of incorporation.”).

‘4 The States of Alaska, Illinois, Michigan and New York

have written into their constitutions provisions protecting

14

Which particular state common law approach to public

employee pension benefits is adopted in a particular

jurisdiction is, of course, utterly crucial to a judicial

finding of whether legislative change is permissible. Yet

this widespread diversity has never deterred this Court

from looking to this “law of the place” to determine the

existence and extent of a purported pension contract in a

Contract Clause challenge to state pension law changes.

See Minneapolis Police Relief Association v. Sundquist,

104 S. Ct. 1902 (1984) (mem.) (upholding a twe percent

increase in employee contributions); Allen v. Bu. of Adm.

Publ. Emp., 104 S. Ct. 1262 (1984) (mem.) (upholding

pension law changes decided below under “reasonable

modification” approach); Lyon v. Flouring, 396 U.S. 274

(1970) (mem.) (upholding pension law change on “reason-

able modification” theory); Dodge v. Board of Education,

302 U.S. 74 (1937) (Rejecting a Contract Clause challenge

to actual reduction in retiree benefits on a “no contract”

theory.).°

public employee pension rights. For a discussion of the various

common law approaches to public employee pension benefits, see

Pineman v. Oechslin, 637 F.2d 601, 604-05 (2nd Cir. 1981);

Pineman v. Oechslin, 488 A.2d 803 (Conn. 1985); Note, “Public

Employee Pensions in Times of Fiscal Distress,” 90 Harv. L.

Rev. 992, 998-1005 (1977); Annot: “Vested Right of Pensioner to

Pension,” 52 A.L.R.2d 430 (1957) (and Supplement).

© There is nothing in United States Trust Co. v. New Jersey,

431 U.S. 1 (1977) that remotely suggests that state common law

need no longer be examined to determine the existence and

terms of a pension contract. That decision reaffirms the “law of

the place” tenet and recognizes that amendment or modification

of a statutory contract is permissible. 431 U.S. at 19. See

Schwartz, “Old Wine in Old Bottles: The Rennaissance of the

Contract Clause,” 1979 S. Ct. Rev. 95, 99. The reason this Court

did not have to look to state law in United States Trust was that

“the settled rule of decisions” in the Supreme Court, Hale, “The

Supreme Court and the Contract Clause: III,” 57 Harv. L. Rev.

852, 869 (1944), including 100-year old precedent on the

enforcibility of bond contracts, 431 U.S. at 24-25, n.22 and n.23,

made such an inquiry utterly unnecessary. Moreover, summary

dispositions in public employee pension law cases both before

15

What did the lower courts find when they examined the

Maryland “law of the place” incorporated into Petitioners’

alleged statutory contract? They found Maryland prec-

edent concluding that public employee pension rights were

contractual to the extent that “future benefits vested as

they were proratedly earned,” City of Frederick v. Quinn,

supra, 35 Md. App. at 630. But under Quinn even earned

benefits could be changed:

The pension plan is not immutable and the

government-employer need not keep its provisions

precisely intact. As government grows in size and

complexity and as more employees draw from the

fund, changes must often be made to assure the

soundness of the fund and permit its growth

commensurate with its prospective needs. The

contractual or vested rights of the employee in

Maryland are subject to a reserved legislative

power to make reasonable modifications in the

plan, cr indeed to modify benefits if there is a

simultaneous offsetting new benefit or liberalized

qualifying condition. Each case where a changed

plan is substituted must be analyzed on its record

to determine whether the change was reasonably

intended to preserve the integrity of the pension

system by enhancing its actuarial soundness, as a

reasonable change in promoting a paramount

interest of the State without serious detriment to

the employee. In short, the employee must have

available substantially the program he bargained

for and any diminution thereof must be balanced

by other benefits or justified by countervailing

equities for the public’s welfare. Jd. at 630-31.

(Emphasis in original).

See also Baker v. Baltimore County, 487 F. Supp. 461 (D.

Md. 1980) aff'd, 660 F.2d 488 (4th Cir. 1981) (Applying

the reasonable modification test of Quinn to changes in a

and after United States Trust make it clear that the “law of the

place” and the legislative power to amend pension contracts, are

principles that are still very much alive in this area of the law.

16

contributory municipal pension plan that resulted in an

increase in contributions and a capped COLA). The 1979

Maryland General Assembly was aware of its power under

Quinn to make reasonable modifications, see pp. 2-3,

supra; and the 1984 General Assembly structured its

pension reform legislation to accommodate this standard.

It gav2 teachers and employees the option of preserving

earned benefits and sought in good faith to substitute

member benefits and to preserve the actuarial and fiscal

soundness of the retirement systems. See MSTA v.

Hughes, supra, 594 F. Supp. at 1364, 1368 and 1370. The

State submits that the settled law of Maryland’® per-

mitted the legislative changes challenged by the Petition-

ers, that two federal courts have applied that law

correctly, see Bishop v. Wood, 426 U.S. 341, 346 (1976),

and that no substantial question is raised by this

particular federal determination of State law, see Hale,

“The Supreme Court and the Contract Clause: III,” 57

Harv. L. Rev. 852 (1944), that predetermined the course of

this litigation.

‘6 Maryland caselaw is no less “settled” because of the

possible conflict between Quinn, which held a municipal pension

right enshrined in a charter to be a contract subject to

reasonable legislative modification, and Mazor v. Department of

Corrections, supra, which found a State pension to be a gratuity.

See n.9, supra. Both cases accord the legislative body wide

latitude in making pension law changes. And although if the

issue were before the Court, it would not “assume” the existence

of a contract, as Petitioners urge here, and would attempt to

resolve the differences in the cases, see Dodge v. Board of

Education, this certainly is not much of a reason to grant review

here.

It is also important to note that other features of the law of

Maryland besides Quinn militate against easy reliance on a

contract of “no change” in pension benefits. Maryland has no

impairment of contract clause in its Constitution or a provision

preserving public employee pension benefits. Rather, in its

Constitution, the State reserves to the people “the exclusive

right of regulating the internal government,” Article 4, Md.

Decl. of Rights; and prevents the Legislature from pledging the

credit of the State in aid of individuals, Article III, § 34. In

oon

17

Il.

THE DECISIONS BELOW ARE FULLY CONSISTENT WITH CASES

OF THIS COURT AND ARE NOT IN CONFLICT WITH HOLDINGS IN

ANY FEDERAL CIRCUIT OR THE HIGHEST COURT OF ANY STATE.

Petiticners strain to find a purported conflict between

the decision of the United States Court of Appeals for the

Fourth Circuit and cases of this Court as well as those of

certain State and federal courts. However, an examination

of these decisions reveals no conflict grounded in an

interpretation of federal constitutional law. Indeed, as the

State has argued above, any conflict in jurisdictions is

premised on the “law of the place,” not on a variance in

the constitutional principles applied to statutory pension

contracts.

The employees and teachers assert that the courts below

erroneously and singularly concluded that the alleged

contract of no change in benefits was “void ab initio” as

surrendering an essential e'ement of sovereignty reserved

to the states. This is, at best, an overstatement. What the

District Court said was that if the alleged contract

irrevocably waived the State’s ability to modify the law

with respect to future pension benefits, it would have

constituted a surrender of reserved power. See MSTA uv.

Hughes, supra, 594 F. Supp. at 1362. Because the

Maryland caselaw that formed part of Petitioners’ contract

permitted legislative change, the lower court did not have

to decide and, in fact, did not decide a reserved power

issue. Nor did the court below give undue deference to the

1984 pension law changes because the purported contract

addition, in Maryland, State employees do not have “employ-

ment contracts” to which a pension benefit could attach and by

statute payment of teacher pensions are merely a State grant for

aid to education in the counties. See Md. Code, Education

Article, § 5-201. Finally, Maryland caselaw views as ultra vires

an attempt by a government body to formally bind itself in

perpetuity in the exercise of its governmental powers. West-

minster Water Co. v. Westminster, 98 Md. 551 (1904).

18

touched an area of reserved power. Even though it

concluded that no substantial contract impairment ex-

isted, the District Court nevertheless painstakingly and at

length analyzed the justifications for the 1984 law and the

problems that led to its enactment to insure that the

State’s self-interest was not at stake. In short, there was

no error in the lower court’s application of the reasonable-

and-necessary test of United States Trust to the facts of

this case and in its conclusion that those facts afforded a

further ground for upholding the Maryland statute.

Even if the decisions below had rested totally on a

finding that Petitioners’ alleged contract of “no change” in

future pension benefits invaded the State’s reserved

powers, such a conclusion is not at odds with any decision

of this Court. Both Butler v. Pennsylvania, 10 How. 400,

417 (1851), and Newton v. Mahoning County, 100 U.S. 548

(1879), suggest that in some respects a state’s control over

the compensation paid its employees cannot be sur-

rendered away by contract. These cases and later decisions

of this Court recognize a distinction between compensation

contracts for past services and those for future services, as

well as those of a short-term and long-term nature. For

example, Butler (and later Crenshaw v. United States, 134

U.S. 99, 106 (1890)) states that:

The promised compensation for services actually

performed and accepted during the continuance of

the particular agency may undoubtedly be claimed,

both upon principles of compact and of equity; but

to insist beyond this on the perpetuation of a public

policy either useless or detrimental, and upon a

reward for acts neither desired nor performed,

would appear to be reconcilable with neither

common justice nor common sense.

See also Hall v. Wisconsin, 103 U.S. 5 (1880), holding that

a compensation agreement for services actually performed

“during a limited period” pursuant to a statutorily-

mandated written contract was protected by the Contract

es

A LE, tt i a YF NN NF RR Ee ka

Oe ae

19

Clause, id. at 10; and Local Div. 589, etc. v. Comm. of

Mass., 666 F.2d 618, 641 (1st Cir. 1981), cert. denied, 457

U.S. 1117 (1982), indicating that:

[T]he state can override a promise by one of its

authorities made several years before that ties the

hands of all future legislatures in an area of great

importance to the public, concerning serious prob-

lems (labor/wage/cost/efficiency negotiations)

where few would claim to have found even a

provisionally satisfactory answer, let alone a

permanent one.

The lower courts here have espoused these very same

principles, suggesting only that a permanent contract

foreclosing any modification of future rather than earned

pension benefits would raise reserved power concerns.

This well-recognized dichotomy between future or past

compensation and long and short-term public employee

compensation arrangements disposes of Petitioners’ ill-

founded fears that denial of review here will encourage

states to dishonor public employee collective bargaining

agreements — agreements that are invariably in effect for

only a limited time — and distinguishes all of the

collective bargaining cases that are purportedly in conflict

with the decision here.'’

Finally, it should be noted that on every occasion this

Court has considered the merits of cases involving changes

in government pension plans challenged on a Contract

Clause-type of theory, it has upheld the legislative action.

'’ There are, of course, more compelling reasons to apply the

reserved powers doctrine to legislative changes of future pension

benefits, rather than mere compensation contracts, because of

the far-reaching impact of such pension plans on a State’s fiscal

health, its bond rating, and the compensation and welfare of its

employees. See AFSCME Councils 6, 14, 65 and 96 v. Sundquist,

338 N.W.2d 560, 571, n.15 (1983), appeal dismissed for want of a

substantial federal question, 104 S. Ct. 1902 (1984). However,

the question is not presented in this case.

20

See Minneapolis Police Relief Association v. Sundquist,

supra; Allen v. Bd. of Adm. Publ. Emp., supra; Lyon v.

Flouring, supra; Dodge v. Board of Education, supra;

Pennie v. Reis, 132 U.S. 464 (1898); United States v. Teller,

107 U.S. 64 (1883). The State submits that the decisions

below are fully consistent with this Court’s past treatment

of the constitutionality of public employee pension law

changes and raise no genuine conflict with any other state

or federal case.’®

18 Little need be said with respect to an asserted conflict

between the Fourth Circuit decision and Indiana ex rel.

Anderson v. Brand, 303 U.S. 95 (1938). Although decided under

the aegis of the Contract Clause, the latter case is simply a

forerunner of modern procedural due process cases and First

Amendment cases on political firings. it has nothing to do with

the issues presented by Petitioners.

Finally, the Petitioners contend that a conflict exists between

this and state court cases as to whether the reasonable-and-

necessary standard of United States Trust can be met by

asserting “financial reasons.” In doing so, petitioners seek to

characterize actuarial soundness, and enhancement of the

State’s ability to accurately plan fiscal strategy as “financial

reasons,” thereby stretching the term far beyond the meaning it

had in United States Trust, where this Court said that “a state

cannot refuse to fulfill its financial commitments simply because

it would prefer to spend the money for some other purpose.” The

cases cited by Petitioners do not reveal any conflict worthy of

reconciliation by this Court. Two of the cases cited, Continental

Illinois National Bank & Trust Co. v. State of Washington, 696

F.2d 692 (9th Cir.) appeal dismissed, 460 U.S. 1077 (1983); and

Carlstrom v. State of Washington, 694 P.2d 1 (Wash. 1985), in

fact involve a bare desire on the part of the state to spend less

money. Two other cases, Ass’n of Pa. State College v. State

System, 479 A.2d 962 (Pa. 1984); and Singer v. City of Topeka,

607 P.2d 467 (Kan. 1980), turn on questions of state law, and do

not reach the issue of reasonableness and necessity. Miles v.

Tenn. Consol. Retirement System, 548 S.W.2d 299 (Tenn. 1976),

did not reject the State’s asserted purpose of alleviating the

funding problems of the pension system, but instead found there

had been no factual showing that alleviating the funding

problems would protect a vital interest of the state. 548 S.W.2d

at 305. Finally, in Marvel v. Dannemann, 490 F. Supp. 170 (D.

Del. 1980), the court recognized that protection of the fiscal

integrity of the fund would serve a substantial and important

21

Il.

NO SUBSTANTIAL FEDERAL QUESTION IS RAISED AS TO

WHETHER AS A FACTUAL MATTER PETITIONERS’ PENSION CON.

TRACT WAS IMPAIRED OR WHETHER THE STATE FACTUALLY

JUSTIFIED THE NEED FOR CHANGES IN MARYLAND PENSION

LAW.

The courts below found no contract impairment both as

a legal and a factual matter. Because under Maryland law

only “earned” benefits were within the employees and

teachers’ “contract” and the only non-voluntary option in

the 1984 statute (the “bifurcated” option) preserved such

benefits, no impairment of a contractual obligation

resulted. In part, the District Court characterized this

operation of the 1984 law as a prospective rather than

retroactive change. Rather than treating the issue in

terms of retroactivity, the lower court could have just as

easily couched this conclusion as a finding of no contract

for future benefits or of no impairment of a contract right,

see In re Enrolled Senate Bi!l 1269, 209 N.W.2d 200 (Mich.

1973). Regardless of the characterization, the result is the

same, the 1984 statute does not offend the Contract

Clause. Moreover, in light of the Maryland cases per-

mitting legislative alteration of benefits, the pervasive

State regulation of pensions, including the ongoing study

by the Maryland General Assembly of the 1979 pension

reform act with an eye toward future changes, and the

almost instantaneous troubles the systems experienced,

public interest, and that it could ju tify modifications of a

pension plan. 490 F. Supp. at 176 and n.6. However, under the

facts of that case the court found that the purpose was not to

increase the fiscal integrity of the fund, but to provide that

public funds would bear less of the cost. In the case at hand, the

court found that the actual purpose of the legislation was to

enhance actuarial soundness and to aliow more accurate fiscal

planning. Nothing in the cases cited by Petitioners indicates

that these purposes cannot satisfy the test of reasonableness and

necessity.

22

the Petitioners could have no reasonable expectation that

the 1979 law would remain unchanged.

Other factors mandated the finding of no substantial

impairment. The 1979 statutory “contract” was neither

repudiated nor repealed. Only a few of the ten benefits

enumerated in the alleged contract were affected by the

1984 legislation. And limiting the COLA and increasing

contributions can be “reasonable modifications” to a

pension system. See Baker v. Baltimore County, 487 F.

Supp. 461, 470 (D. Md. 1980), aff'd, 660 F.2d 488 (4th Cir.

1981) (Applying Maryland law).

Unique problems are posed by an unlimited cost-of-

living adjustment, particularly in Maryland where the

cost of the benefit has been totally State-funded. It is a

highly volatile benefit that defies predictability of annual

costs and responsible planning; it results in lack of growth

in funds commensurate with system needs; and it results

in too many years when system assets will not exceed

liabilities by a comfortable margin.’® Placing a three

percent ceiling on such a benefit contributes to alleviating

19 Maryland is the only state with an unlimited COLA and

the only state advance-funding such a benefit. The effects have

been painful and apparent. Since 1975, there have been no

major benefit packages for system members, particularly

placing members of the new pension system at a comparative

disadvantage. Pay increases were becoming increasingly erratic

with a resultant adverse impact on the systems. This is so

because a pay raise increases the payroll base that funds

pensions and annuities: the lack of one results in an “actuarial

loss.” In the meantime, Maryland has acquired a per capita

burden of unfunded pension liabilities that is second in the

Nation. It is also noteworthy that critics of the federal

employees pension system blame its unlimited COLA for high

costs. See Committee on Post Office and Civil Services, House of

Representatives, “Designing a Retirement System for Federal

Workers Covered by Social Security,” Comm. Print 98-17, 98

Cong. 2d. Sess. (Dec. 1984) at 85. The latter study notes that

private pension plans were indexed to inflation only to about 30

percent. Jd.

23

these problems. MSTA v. Hughes, supra, 594 F. Supp. at

1368 (“One need not be an actuary to conclude that

predictable cost-of-living increases for future retirees

stabilizes cash in-flow and out-flow projections, allows for

sounder investment strategies, and provides a more

predictable basis for actuarial assumptions.”}. Thus, the

lower courts found not only that the 1984 pension law

changes were a “reasonable modification,” but also

reasonable and necessary to serve important state

purposes.

Because the Legislature took pains to consider the

interests of teachers and employees by developing a

“menu” of options for them, it took a future risk for the

State by retaining the volatile unlimited COLA for

members willing to make a small additional contribution

toward retirement costs from their fiscal 1985 pay raise.

Nevertheless, this option is a reasonable system modi-

fication and no severe burden for employees and teachers.

Their contribution rates rose only from five to seven

percent. Under Maryland law, State police are presently

paying eight percent. Md. Code, Art. 88B, § 56(1)(b).

Federal employees pay seven percent. Increased con-

tributions are not deposited in general funds, but go into

the annuity fund for the payment of benefits. Moreover, an

increase in contributions helps keep that fund in a sound

actuarial state.

The actions of the 1984 General Assembly were not only

reasonable and enhanced the actuarial and fiscal sound-

ness of the pension systems, but they also resulted in

substantial benefits te employees and teachers. First,

State employees received a six percent pay raise that

automatically translates into higher pension levels in the

future. Teachers too received higher pay increases both in

1984 and in future years as a result of the 1984 General

Assembly’s five-year commitment of $616 million in

24

increased aid to education. The pay increases will also

result in higher pensions for teachers.

Other offsetting benefits are apparent from the 1984

pension reform package. Employees and teachers electing

the “bifurcated option” are not obliged to make con-

tributions unless their salary exceeds the Social Security

wage base. Old system members will have the future

solvency of the system shored up by the General

Assembly’s decision to use State contributions to the new

system to help pay benefits under the old. See Chapter

290, Laws of 1984. Finally, capping the COLA will also

benefit members of the old system in terms of pre-

dictability of costs, financial soundness and future health

of the system, and a decline in unfunded accrued

liabilities. In fact, under the 1984 statute, the Legislature

expressly directed the savings from the measure in Fiscal

Year 1985 to be used for reducing unfunded accrued

pension liabilities. And this occurred again in FY 1986.

Clearly, employees and teachers received sufficient bene-

fits te offset any losses they claim to have incurred.

Finally, Maryland truly believed in 1979 that it had

remedied the problems of the retirement systems. It could

not have reasonably foreseen early teacher retirements to

obtain the unlimited COLA, the astronomical cost-of-

living that followed the enactment of the 1979 law, the

successful campaign of the unions to discourage transfers

into the new systems, or the parade of errors that

mushroomed pension costs and unfunded accrued li-

abilities by billions of dollars. These are unique facts that

called upon the Legislature to act. The General Assembly

responded in a unique fashion and, in light of the

prevailing common law protections afforded public pension

benefits in Maryland, addressed this need with a reason-

able compromise that took into account, in the greatest

way possible, the interests of teachers and employees. The

25

State submits that review is not necessary by this Court to

confi7m that result or to consider the many alternate

greunds pressed in support of the judgment below.”°

CONCLUSION

For all of these reasons, the petition for a writ of

certiorari should be denied.

Respectfully submitted,

STEPHEN H. Sacus,

Attorney General of Maryland,

Diana G. Morz,

Susan K. Gacvey,

Linpa H. Lamone,

Carot S. Sucar,

KaTHrRYN M. Rowe,

Rosert A. ZARNOCH,

(Counsel of Record),

Assistant Attorneys General,

90 State Circle,

Annapolis, Maryland 21401,

(301) 841-3889,

Attorneys for Respondents.

20 The State advanced additional grounds below that support

the judgment that the 1984 law was constitutional, viz: (1) that

under Mazor v. Department of Corrections, supra, and other

relevant “law of the place,” the 1979 statute could create no

contract; (2) that Petitioners, who were neither induced to

employment by the alleged 1979 contract nor declined outside

employment solely to remain in the old retirement systems, can

point to no legally sufficient consideratien to support a statutory

contract; (3) that the alleged contract of “no change” in benefits

was conditioned on the success of the 1979 pension reform

legislation and that the failure of reasonable legislative

expectations for such reform justified the 1984 changes; and (4)

that employees and teachers were justly compensated for any

impairment of their rights.