OTIS R. BOWEN, SECRETARY OF HEALTH AND HUMAN SERVICES, ET AL.,
APPELLANTS V. PUBLIC AGENCIES OPPOSED TO SOCIAL SECURITY ENTRAPMENT,
ET AL.  UNITED STATES OF AMERICA, ET AL., APPELLANTS V. STATE OF
CALIFORNIA

   No. 85-521

   In the Supreme Court of the United States

   October Term, 1985

   On Appeal from the United States District Court for the Eastern
District of California

   Brief for the Appellants

                       PARTIES TO THE PROCEEDING

   In addition to the parties named in the caption, plaintiffs in the
district court were the Yorba Linda Library District, the North
Bakersfield Recreation and Park District, the Delano Mosquito
Abatement District, Katherine T. Citizen, William Rasmussen, and
Margie Hunt.  Defendants in the district court included, in addition
to the parties named in the caption, John Svahn.  Named as "real
parties in interest" were George Deukmejian, Michael Franchetti, the
Board of Administration of the Public Employees Retirement System of
the State of California, Robert F. Carlson, Bill D. Ellis, Jake
Petrofino, Prescott R. Reed, Wilson C. Riles, Jr., Mel Reuben, Jack G.
Willard, Brenda Y. Shockley, and Susan Tohbe.

            TABLE OF CONTENTS
   Parties to the proceeding
   Opinion below
   Jurisdiction
   Constitutional and statutory provisions involved
   Question Presented
   Statement
   Summary of argument
   Argument:
      The 1983 amendment did not effect a taking within
      the meaning of the Fifth Amendment
      A. Secti-n 418 agreements do not create vested
          property rights that are protected by the Fifth
          Amendment
      B. Congress did not surrender its authority to
          make changes in the Social Security System
          through legislation
      C. Congress could not surrender its sovereign
          authority to modify the Social Security System
      D. Even if Section 418 agreements are property,
          the 1983 amendment did not effect a taking within the
          meaning of the Fifth Amendment
   Conclusion

                             OPINION BELOW

   The opinion of the district court (J.S. App. 1a-35a) is reported at
613 F.Supp.558.

                             JURISDICTION

   The judgment of the district court (J.S. App. 36a) was entered on
May 31, 1985.  A notice of appeal (J.S. App. 37a-38a) was filed on
June 27, 1985.  On August 19, 1985, Justice Rehnquist extended the
time for docketing the appeal through September 25, 1985.  The
jurisdictional statement was filed on that date;  the Court noted
probable jurisdiction on December 2, 1985.  The jurisdiction of this
Court is invoked under 28 U.S.C. 1252.

           CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED

   42 U.S.C. 418(a)(1) reads in relevant part:

         The Secretary of Health and Human Services shall, at the
      request of any State, enter into an agreement with such State
      for the purpose of extending the insurance system established by
      this subchapter to services performed by individuals as
      employees of such State or any political subdivision thereof.
      Each such agreement shall contain such provisions, not
      inconsistent with the provisions of this section, as the State
      may request.

   42 U.S.C. (Supp. I) 418(g) reads:

         No agreement under this section may be terminated, either in
      its entirety or with respect to any coverage group, on or after
      April 20, 1983

   42 U.S.C. 1304 reads:

         The right to alter, amend, or repeal any provision of this
      chapter is hereby reserved to the Congress.

   The Fifth Amendment to the Constitution reads, in relevant part:

         (N)or shall private property be taken for public use, without
      just compensation.

                          QUESTION PRESENTED

   Whether Section 103(a) of the Social Security Amendments Act of
1983, 42 U.S.C. (Supp. I) 418(g), effected a "taking" of property
within the meaning of the Fifth Amendment by preventing states from
withdrawing from the Social Security System.

                               STATEMENT

   1. Congress created the Social Security System in 1935 to serve as
the Nation's basic social insurance program.  Ch. 531, Sections 201 et
seq., 49 Stat. 622 et seq.  The System, which now provides benefits to
aged, ill and disabled individuals, is financed through mandatory
payments by current employees and their employers (at present, 7.15%
of the employee's first $42,000 of wages).  See 26 U.S.C. 3101(a) and
(b);  42 U.S.C. (Supp. I) 430(c);  50 Fed. Reg. 45558, 45559 (1985).
/1/ For most employees and employers, participation in the System is
mandatory;  as of 1983, 115 million workers, or approximately 90% of
the american workforce, were covered by the System.  H.R. Rep. 98-25,
98th Cong., 1st Sess. Pt. 1, at 13 (1983).  /2/

   As originally enacted, the Social Security Act, 42 U.S.C. 301 et
seq., excluded state and local government employees from participation
in Social Security.  See 42 U.S.C. 410(a)(7).  In 1950, however,
Congress amended the Act to permit the states voluntarily to enroll
their employees, and those of their political subdivisions, in the
System.  Social Security Act Amendments of 1950, ch. 809, Section 106,
64 Stat. 514, codified at 42 U.S.C. (& Supp. I) 418.  Specifically,
Section 418 authorized the federal administrator of the System (now
the Secretary of Health and Human Services (the Secretary)), "at the
request of any State, (to) enter into an agreement with such State for
the purpose of extending the (Social Security) insurance system * * *
to services performed by individuals as employees of such State or any
political subdivision thereof." 42 U.S.C. 418(a)(1).

   Pursuant to these so-called "Section 418 agreements" -- which must
"contain such provisions, not inconsistent with the provisions of
(Section 418) as the State may request" (42 U.S.C. 418(a)(1)) --
participating states may enroll all, or only specified "coverage
groups," of their employees.  42 U.S.C. 418(c).  See 42 U.S.C.
418(b)(5);  Subcomm. on Social Security of the House Comm. on Ways and
Means, 97th Cong., 2d Sess., WMCP:  97-32, Termination of Social
Security Coverage for Employees of State and Local Government and
Nonprofit Groups 1 (Comm. Print 1982) (hereinafter cited as H.R. Comm.
Print 97-32).  /3/ The Act thus leaves it to the state to determine
which of its employees, and which local government employees, will be
enrolled in the System;  individual employees or coverage groups may
not elect on their own to join (or to refuse to join) the System.  See
H.R. Comm. Print 97-32, at 1, 5.  /4/

   States that elect to participate in the System are responsible for
collecting and periodically paying to the Secretary of the Treasury
"amounts equivalent to the sum of the taxes" that would be due if
their employees otherwise were covered by the Act (42 U.S.C. (& Supp.
I) 418(e)(1)), and the other requirements imposed upon the states
generally are the same as those placed on private employers by the
Act.  See 42 U.S.C. 418(i).  The Secretary may impose interest
penalties for late payment.  42 U.S.C. 418(j).  The statute also makes
provision for the assessment of amounts due (42 U.S.C. 418(q)), for
the administrative determination of challenges to assessments and
claims for refunds (42 U.S.C. 418(s)), and for judicial review of such
determinations (42 U.S.C. 418(t)).

   Following the enactment of Section 418, all 50 states executed
agreements with the Secretary to obtain Social Security coverage for
their own employees or for those of their political subdivisions.  /5/
And the percentage of state and local government employees enrolled in
the System through Section 418 agreements increased dramatically, from
11% in 1951 to 70% in 1970.  H.R. Comm. Print 97-32, at 24.  The
percentage of such employees covered by Section 418 agreements has
remained roughly constant since then (see ibid.);  as of 1983, some
9.4 million of the approximately 13.2 million state and local
government employees in the United States were participants in the
Social Security System.  H.R. Rep. 98-25, supra, at 17.

   2. As originally enacted, Section 418 provided that a participating
state could elect to terminate its Section 418 agreement, in whole or
in part, upon two years' notice to the Secretary.  42 U.S.C. 418(g).
/6/ During the statute's first two decades of operation, virtually no
states or subdivisions chose to withdraw from the System.  H.R. Rep.
98-25, supra, at 18;  H.R. Comm. Print 97-32, at 26.  /7/ From 1977
on, however, the number of withdrawals increased significantly.
Between 1977 and 1981, 96,000 state and local government employees
were withdrawn from the System;  by 1983, termination notices were
pending for 634 state and local entities representing an additional
227,000 employees.  H.R. Rep. 98-25, supra, at 18.  See S. Rep. 98-13,
98th Cong., 1st Sess. 99 (1983).  /8/

   In that year, Congress determined that the continued and
accelerating withdrawal of employees by states and localities was
threatening the integrity of the Social Security System and the
System's role as the Nation's basic insurance program.  It concluded
that permitting states and localities to terminate Social Security
participation for their employees was inequitable both for the workers
who lost coverage and for the employees who continued to pay into the
system.  H.R. Rep. 98-25, supra, at 18-19.  And it noted that
withdrawals at the current rate would cost the Social Security trust
funds $500 million to $1 billion annually.  H.R. Comm. Print 97-32, at
13-14;  S. Rep. 98-13, supra, at 104;  S. Rep. 98-23 98th Cong., 1st
Sess. 2, 13 (1983).

   As part of the Social Security Amendments Act of 1983 (the 1983
amendment), Pub. L. No. 98-21, 97 Stat. 65 et seq., Congress
accordingly amended Section 418(g) to provide that "(n)o agreement
under this section may be terminated, either in its entirety or with
respect to any coverage group, on or after April 20, 1983." /9/ This
amendment prevents a state from withdrawing its employees (or those of
its political subdivisions) from the Social Security System even if a
two-year termination notice had been filed prior to 1983 and was
pending at the time that Section 418 was modified.  /10/

   3. At the time of the 1983 amendment to Section 418(g), appellee
State of California -- which has had a Section 418 agreement with the
Secretary since 1951 (J.A. 29) /11/ -- had filed termination notices
on behalf of approximately 70 of its political subdivisions with some
34,000 employees (J.A. 61).  Those employees were to have been
withdrawn from the System at the end of the year.  The 1983 amendment,
however, prevented the notices from taking effect.

   In response to this development, these suits were brought in the
United States District Court for the Eastern District of California to
challenge the validity of amended Section 418(g).  The first action
was filed by one set of appellees -- several public agencies of the
State of California, their employees, local taxpayers, and a group
called "Public Agencies Opposed to Social Security Entrapment" (POSSE)
-- who contended, in part, that the 1983 amendment deprived them of
their contract rights without according them due process or just
compensation.  J.S. App. 9a-10a.  The second suit was filed by the
State of California, which claimed that Section 418(g) infringed the
State's contract and violated the Tenth Amendment by impairing the
State's ability to structure its relationships with its employees.
J.S. App. 10a-11a.  Both sets of appellees sought injunctive and
declaratory relief.

   The district court granted summary judgment to the appellees.  /12/
Reviewing California's Section 418 agreement with the Secretary, the
court found that the "document evidences an agreement between the
parties signatory thereto, that each promises to do certain things and
to assume certain obligations" (J.S. App. 30a).  In the court's view,
such an agreement is a contract and thus "property" within the meaning
of the Fifth Amendment's Taking Clause (id. at 20a, 30a-31a).
Similarly, the court found that the right to terminate an agreement on
two years' notice, which appeared in the original version of Section
418(g) and was echoed in California's Section 418 agreement (see J.S.
App. 4a-5a;  J.A. 31), "is a contractual right running in favor of the
public agencies." Id. at 21a.  /13/ While the court assumed that
Congress would have had the authority to divest the State of its right
to withdraw "if the right existed solely by virtue of the statute,"
here the ability to withdraw from the Social Security System "draws
its independent existence from the plain terms of the contract." /14/
The court therefore held that "Congress is simply not free to deprive
the State of its contractual right without just compensation." J.S.
App. 32a (footnotes omitted).

   Although the district court thus found that the 1983 amendment to
Section 418(g) effected a taking of property, it concluded that it was
not free to order payment of just compensation or to refer the case to
the Claims Court for the award of that relief.  The court reasoned
that the purpose of the 1983 amendment was to "ensure an adequate
financial basis for (the Social Security) system by requiring the
states and their public agencies to contribute to the system," so that
"requir(ing) the United States to pay just compensation by making the
contribution for the public agencies is simply and clearly contrary to
the will of Congress." J.S. App. 34a.  The court therefore declared
the amendment void, and ordered the Secretary to "accept the
notifications of withdrawal properly tendered to her." Id. at 35a.

                          SUMMARY OF ARGUMENT

   A. In assuming that Section 418 agreements are "contracts" that
create vested rights, the district court committed a fundamental
error.  To be sure, Section 418 and the agreements consummated under
its authority describe the conditions that govern state participation
in the Social Security System;  federal and state administrative
officials must comply with those conditions, as they must with all
aspects of federal law.  But while Section 418 agreements thus have a
"contractual aspect," "(u)nlike normal contractual undertakings" they
implement a program that "originate(s) in and remain(s) governed by
statutory provisions expressing the judgment of Congress concerning
desirable public policy." Bennett v. Kentucky Department of Education,
No. 83-1798 (Mar. 19, 1985), slip op. 11, 12.  Arrangements of this
sort generally are understood not to create vested rights, but rather
to "'declare() a policy to be pursued until the legislature shall
ordain otherwise.'" National Railroad Passenger Corp. v. Atchison, T.
& S.F. Ry., No. 83-1492 (Mar. 18, 1985), slip op. 14 (citation
omitted).

   That Congress did not intend to create contractual rights here is
confirmed both by the legislative history and by the structure of the
Act.  Virtually no attention was paid to the termination provision
when Section 418 was enacted, evidently because it was assumed that
few groups ever would seek to terminate coverage.  And Congress, from
the time of the creation of the Social Security program, has signalled
its intention to retain flexibility in structuring the System by
expressly reserving the power "to alter, amend, or repeal any
provision of (the Act)." 42 U.S.C. 1304.  Congress hardly can have
expected legislation containing such a provision to give rise to
static property interests.

   It is true, of course, that the Section 418 program makes use of
written agreements.  But Congress provided that the states could join
the System through individual agreements in an attempt to permit them
to play a continued role in the provision of retirement and disability
benefits to state and local government employees;  written agreements
obviously are necessary to memorialize these arrangements.  It would
turn this cooperative aim on its head, however -- and ultimately would
disserve state interests -- to conclude that attempts to accommodate
the states in federal regulatory programs give rise to contractual
relationships that make changes in those programs constitutionally
impermissible.

   B. 1. Even on its own terms -- considering California's agreement
to be a contract -- the district court's analysis is flawed.  The
agreement was written to effectuate Section 418, and expressly
provides that it extends Social Security protection to state and local
government employees "in conformity with" that provision.  Section
418, meanwhile, flatly provides that federal-state agreements may not
contain terms that are "inconsistent with the provisions of this
section." Because the termination provision of California's Section
418 agreement is now inconsistent with the amended Section 418, that
provision is unenforceable.

   2. The district court's reasoning also is inconsistent with this
Court's repeated holding that "(c)ontractual arrangements remain
subject to subsequent legislation by the presiding sovereign * * *
unless (the sovereign's right to enact such legislation) 'has been
specifically surrendered in terms which admit of no other reasonable
interpretation.'" Merrion v. Jicarilla Apache Tribe, 455 U.S. 130,
147-148 (1982) (citation omitted).  There is absolutely nothing in
California's Section 418 agreement that purports to insulate appellees
from the effects of legislative changes in the System, or to guarantee
that Congress will not enact supervening legislation obviating the
agreement altogether by requiring the states to participate in Social
Security.  And again, Section 1304 confirms that Congress did not
intend to abandon its sovereign authority to adjust, through
legislation, the Social Security obligations of state and local
employers.

   Congress thus could have ignored the outstanding agreements and
simply enacted legislation permanently bringing into the System those
state and local employees who already are covered -- as the district
court itself evidently recognized.  And if Congress retained the
authority to take such action, it is absurd to suggest that the 1983
amendment is constitutionally suspect because Congress achieved the
same result by modifying existing Section 418 agreements.  Indeed, the
Court has squarely rejected the contention that, "in a statute such as
this, regulating purely economic matters, * * * Congress' choice of
statutory language can invalidate the enactment when its operation and
effect are clearly permissible." Usery v. Turner Elkhorn Mining Co.,
428 U.S. 1, 23-24 (1976).

   C. If, on the other hand, the district court meant to conclude that
Section 418 agreements must be construed in a way that would prevent
Congress from making essential modifications in the System, its
holding is inconsistent with this Court's oft-stated admonition that
sovereign authority "cannot be contracted away." North American
Commercial Co. v. United States, 171 U.S. 110, 137 (1898).  See, e.g.,
United States Trust Co. v. New Jersey, 431 U.S. 1, 23 (1977);  Indiana
ex rel. Anderson v. Brand, 303 U.S. 95, 108-109 (1938).  Applying this
principle, the Court repeatedly has rejected challenges to legislative
action abrogating contractual obligations that purported to restrict
the government's power to legislate for the public welfare.  It has
scrutinized such action only to ensure that the challenged legislation
involved a legitimate exercise of "the sovereign right of the
Government to protect the * * * general welfare of the people.'"
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 241 (1978).  In
contrast, the Court has recognized that this principle does not affect
a sovereign's ability to enter into binding financial or debt
contracts.

   If Section 418 agreements are contracts that must be construed to
foreclose the federal government from mandatorily enrolling
participating states in the System, they fall squarely within the
category of agreements that create no vested rights because they
purport to deny the government the authority to take action essential
for the general welfare.  And the 1983 amendment plainly involved a
legitimate attempt to legislate for the public good:  Congress amply
documented its conclusion that the withdrawal of state and local
government employers from the System would leave many workers with
inadequate pension and insurance protection, while providing a
windfall to employees whose Social Security rights have vested.

   D. Finally, even granting the district court all of its
questionable assumptions -- that is, even assuming that Section 418
agreements are binding, enforceable contracts of a conventional sort
-- the court below nevertheless erred in concluding that the 1983
amendment effected a taking in the constitutional sense.  The Court
has identified three principal considerations that bear on the
question whether governmental action that diminishes property rights
amounts to a taking:  "'the character of the governmental action, its
economic impact, and its interference with reasonable
investment-backed expectations.'" Ruckelshaus v. Monsanto Co., No.
83-196 (June 26, 1984), slip op. 17.

   Here, nothing in the character of the 1983 amendment suggests a
taking;  to the contrary, courts should be particularly reluctant to
find a taking when the challenged government action involves the
impairment of a contract.  Because state employers retain the
principal benefit that led them to enter into Section 418 agreements
-- participation in the System -- the economic impact of the
legislation does not rise to the level of a taking.  And it is
difficult to discern any investment-backed expectations on the part of
appellees that are frustrated by the 1983 amendment since, as the
district court acknowledged (J.S. App. 3a-4a), Congress at all times
reserved its authority to enact new provisions including employees of
state and local governments in the System.  In these circumstances,
the amendment cannot be said to have violated "the dictates of
'"justice and fairness."'" Andrus v. Allard, 444 U.S. 51, 65 (1979)
(citations omitted).

                               ARGUMENT

 THE 1983 AMENDMENT DID NOT EFFECT A TAKING WITHIN THE MEANING OF THE
FIFTH AMENDMENT

   The district court has invalidated legislation remedying an
arrangement that was manifestly "inequitable both for the employees
who lose coverage (when states or localities withdraw from the Social
Security System) and for the vast majority of the nation's workforce
who continue to pay into the system." H.R. Rep. 98-25, 98th Cong., 1st
Sess. Pt. 1, at 18-19 (1983).  The impact of the court's decision is
extraordinary.  The holding below will have an immediate effect on the
227,000 state and local govermment employees whose employers attempted
to withdraw from the System as of 1984;  if their coverage is
terminated, a great many of these employees will be left with
inadequate pension and insurance guarantees, while others -- whose
rights in the System already have vested -- will obtain windfall
payments.  Similarly, the decision potentially may affect the pension
rights of more than 9 million other state and local government
employees, whose participation in Social Security (under the district
court's ruling) may be terminated at any time at the election of their
employers.  The financial impact on the System of the district court's
decision also is immense:  if withdrawals are permitted to continue at
their current pace, the Social Security trust funds will lose between
$500 million and $1 billion annually (H.R. Comm. Print 97-32, at
13-14), with an aggregate loss of well over $3 billion for the
1983-1989 period.  S. Rep. 98-23, 98th Cong., 1st Sess. 2, 13 (1983).

   These difficulties, however, are not the inevitable result of some
fatal constitutional flaw in the 1983 amendment that was identified by
the district court.  To the contrary, that court disregarded a range
of considerations that should have been at the center of its
assessment of the 1983 amendment's constitutionality.  The court
failed to consider the purpose of the Section 418 program and the
nature of the agreements consummated under the Act.  It took no
account of Congress's preeminent role in arranging "the burdens and
benefits of economic life." Usery v. Turner Elkhorn Mining Co., 428
U.S. 1, 15 (1976).  And the court gave no weight to the congressional
judgment that, because Social Security is "the Nation's basic social
insurance program" (H.R. Comm. Print 97-32, at 1), "the Nation as a
whole should share in the cost of that program." Senate Special Comm.
on Aging, 96th Cong., 2d Sess., State and Local Government
Terminations of Social Security Coverage 76 (Comm. Print 1980)
(hereinafter cited as 1980 Sen. Comm. Print).  /15/

 A. Section 418 Agreements Do Not Create Vested Property Rights That
Are Protected By The Fifth Amendment

   The district court grounded its holding on the assumption that
Section 418 agreements represent run-of-the-mill contractual
relationships between the state and federal governments, with each
side holding vested property rights.  The 1983 amendment, the court
reasoned, modified and thus impaired the value of the Section 418
agreement at issue in this case, and in that way effected a "taking"
of the property represented by the "contract." The district court's
basic assumption, however, involves a fundamental misunderstanding of
the nature of Section 418, and of the agreements consummated under its
authority.

   Section 418 and the agreements that implement it establish the
conditions that govern current state participation in the System, and
describe the ongoing rights and responsibilities of the state and
federal governments.  Federal administrative officials -- and the
officials of participating states -- plainly must comply with those
conditions, as they must with all elements of federal law.  See
generally Bennett v. New Jersey, No. 83-2064 (Mar. 19, 1985), slip op.
6;  Bell v. New Jersey, 461 U.S. 773, 790-791 (1983).  But while
Section 418 agreements have a "contractual aspect" that may not be
repudiated by the Secretary, a cooperative federal-state program such
as the one established by Section 418 "cannot be viewed in the same
manner as a bilateral contract governing a discrete transaction."
Bennett v. Kentucky Department of Education, No. 83-1798 (Mar. 19,
1985), slip op. 11.  The agreements have no life or legal significance
of their own;  they exist only to implement the Act.

   Section 418 agreements thus do not involve arms-length negotiation
with each side attempting to obtain the benefit of the bargain, or
play the role of contracts that may be said to embody
"investment-backed expectations." Penn Central Transportation Co. v.
New York City, 438 U.S. 104, 124 (1978).  Instead, Congress created
the agreement mechanism simply as a convenient method for "extend(ing)
coverage as quickly and with as little difficulty as possible to those
(state and local government) employees who needed it most." H.R. Rep.
98-25, supra, at 19;  see H.R. Comm. Print 97-32, at 5.  See generally
H.R. Rep. 1300, 81st Cong., 1st Sess. 6 (1949);  S. Rep. 1669, 81st
Cong., 2d Sess. 6 (1950).  In essence, the original version of Section
418 was no different from any statute that establishes a federal
program and gives the states an open option to participate.

   This is a familiar method of federal regulation;  to maintain
flexibility and facilitate effective administration, Congress often
has invited the states to participate voluntarily in the welfare and
disbursement programs that it creates.  /16/ Such arrangements never
have been understood to create enforceable expectations on the part of
participants that prevent Congress from making prospective changes in
the program.  To the contrary, "(u)nlike normal contractual
undertakings," programs of this sort "originate in and remain governed
by statutory provisions expressing the judgment of Congress concerning
desirable public policy." Kentucky Department of Education, slip op.
12.  Section 418 thus effectuates "a regulatory policy," rather than
"a contractual arrangement." National Railroad Passenger Corp. v.
Atchison, T. & S.F. Ry., No. 83-1492 (Mar. 18, 1985), slip op. 14.
And when Congress establishes such a legislative program, "the
presumption is that "(it) is not intended to create private
contractual or vested rights but merely declares a policy to be
pursued until the legislature shall ordain otherwise.'" Ibid.
(quoting Dodge v. Board of Education, 301 U.S. 74, 79 (1937)).  See
Rector of Christ Church v. County of Philadelphia, 65 U.S. (24 How.)
300, 302 (1861).

   That Congress did not intend to create contractual rights here is
confirmed both by the legislative history and by the structure of the
Act.  While Section 418 in its original form offered the states an
opportunity to withdraw from the System, "(t)he termination provision
receive(d) little attention in the legislative histories of amendments
since 1939, presumably because it was assumed that once covered, few
groups would seek to terminate coverage." H.R. Comm. Print 97-32, at
3.  See generally H.R. Rep. 1300, supra, at 6, 10-11;  S. Rep. 1669,
supra, at 6, 10, 13-14;  H.R. Conf. Rep. 2771, 81st Cong., 2d Sess.
100 (1950).  The congressional emphasis, instead, was on the voluntary
nature of the state's initial decision to participate in the System.
See, e.g., S. Rep. 1669, supra, at 10.  In contrast, Congress nowhere
indicated that it intended to freeze the relationship between the
federal government and participating states.

   Moreover, "lest there be any doubt in this case about Congress'
will" (National Railroad Passenger Corp., slip op. 16), the statute
from the outset expressly has reserved to Congress "(t)he right to
alter, amend, or repeal any provision of (the Act)." 42 U.S.C. 1304.
For over a century, the Court has "recognized the effect of these few
simple words" (National Railroad Passenger Corp., slip op. 16 n.22):
"through the language of reservation 'Congress not only retains, but
has given special notice of its intention to retain, full and complete
power to make such alterations and amendments * * * as come within the
just scope of legislative power.'" Ibid.  (quoting the Sinking-Fund
Cases, 99 U.S. 700, 720 (1879)).  Congress hardly can have intended
legislation containing such a provision to give rise to static
property interests.

   It is true, of course, that the Section 418 program makes use of
written agreements, a consideration that the district court evidently
found determinative (see J.S. App. 30a-32a).  But there is no
talismanic significance to the existence of a separate writing signed
by a representative of the federal government.  Congress provided that
the states could join the Social Security System by means of
individual agreements in an attempt to permit them to play a continued
role in the provision of retirement and disability benefits to state
and local employees;  states may enroll certain coverage groups so as
to preserve their existing pension systems, and may include in their
agreements any provisions that are not inconsistent with the Act.  See
H.R. Comm. Print 97-32, at 20.  Written Section 418 agreements
obviously are necessary to memorialize these arrangements.  /17/ It
would turn this cooperative aim on its head, however -- and ultimately
would disserve state interests -- to conclude that attempts to
accommodate the states in federal regulatory programs give rise to
contractual relationships that make changes in those programs
impermissible.  Cf. FERC v. Mississippi, 456 U.S. 742, 765 n.29
(1982).

   Indeed, viewed in context there can be little doubt that the
termination provision in California's Section 418 agreement has no
independent legal significance.  That provision was not separately
negotiated by the State;  it simply echoed -- and added nothing to --
the termination rights granted by the pre-1983 version of Section
418(g).  Not surprisingly, then, nothing in the agreement suggests
that its termination provision was intended to do more than restate
the controlling terms of the statute, or was designed to survive a
legislative change in those terms.

   In any event, Section 418 agreements have none of the indicia of
typical contracts.  Their purpose is not a parochial one related to
the self-interest of the parties.  Nor do the parties venture their
property in exchange for a reciprocal undertaking respecting that
property.  Instead, the agreements make available to individual
workers the benefits of participation in a generally applicable social
welfare program.  The implementation of the agreements is subject to
regulations promulgated by the Secretary.  42 U.S.C. 418(i).  And the
Act makes provision for administrative and judicial review of
challenges to assessments and payments (42 U.S.C. 418(s) and (t)) in a
manner that parallels those applicable to most federal programs.

   In short, the 1983 amendment involved a recasting of the
legislation defining the System -- that is, of the "statutory
provisions expressing the judgment of Congress concerning desirable
public policy." This is not a case where the Secretary refused to
administer the Section 418 program along the lines mandated by
Congress;  instead, Congress used the 1983 amendment to modify the
terms on which the Section 418 program will be administered in the
future.  So long as it had the substantive constitutional authority to
enact the 1983 amendment, there was nothing illegitimate in Congress's
decision to take prospective action of that sort.

 B. Congress Did Not Surrender Its Authority To Make Changes In the
Social Security System Through Legislation

   Despite the programmatic nature of Section 418, the district court
held that Congress may not enact legislation bearing directly on
Section 418 agreements, just as a party to a private commercial
contract generally may not make unilateral changes to its contractual
obligations.  In reaching this conclusion, the district court
evidently reasoned that Congress, no more than the Secretary or any
other administrative official, may change the obligations of
participating states in the absence of extra-contractual legislation
modifying the System as a whole.  As we demonstrated above, this
analysis is flawed.  But even on its own terms, the district court's
reasoning is unpersuasive.  On close examination, it becomes clear
that the 1983 amendment did not in fact deprive appellees of any
rights vested by California's Section 418 agreement:  even if the
district court was correct in concluding that Section 418 agreements
create a contractual relationship between participating states and the
Secretary, it hardly follows that the federal government, by entering
into such agreements, meant to bind itself never to enroll statement
employees in the System mandatorily, or never to modify either Section
418 or the System in a manner that changes the relationship between
state employers and the federal government.

   1. Even considering this case solely within the confines of the
Section 418 agreement, appellees' claims of breach of contract lack
merit.  The agreement at issue here was, of course, written to
effectuate Section 418:  the document recites that the Federal
Security Administrator (the Secretary's predecessor) entered into the
agreement under the authority of Section 418, and declares that the
agreement is intended to extend the protections of Social Security to
various state employees "in conformity with" Section 418 (J.A. 29).
And Section 418(a)(1) itself -- which under the agreement's own terms
is controlling -- flatly provides that federal-state agreements may
not contain provisions that are "inconsistent with the provisions of
this section." Because the termination provision of California's
Section 418 agreement is now inconsistent with the amended Section
418, that provision is unenforceable.

   In recognizing that agreements may not contain provisions that are
inconsistent with Section 418, the parties to California's agreement
plainly intended to preclude "contractual" terms that conflict with
amendments to the statute, as well as terms that are inconsistent with
the statute as it was enacted in 1950.  The agreement nowhere
indicates that it will "conform()" only with pre-existing law.
Similarly, the statute does not suggest that it was meant to
invalidate only provisions of agreements that are "inconsistent" with
the terms of Section 418 as it was originally enacted.  And it is
impossible to believe that Congress meant to bind itself never to
depart from the terms of the Section 418 program as they were
established in 1950.  Section 418 directs the Secretary to include in
his agreements all provisions proposed by the states that are not
inconsistent with the statute (42 U.S.C. 418(a)(1) and (c)(4));  if
Congress gave participating states the right either to leave the
System or to remain indefinitely on their own terms, while denying
itself the opportunity to modify state responsibilities in any way
(or, presumably, the right to terminate state participation in the
System), it "would have struck a profoundly inequitable bargain."
National Railroad Passenger Corp., slip op. 16.  /18/

   This reading of the agreement is supported as well by venerable
principles of contract construction.  It is black letter law that
contracts must be deemed to incorporate the terms of relevant
statutes.  See, e.g., United States v. Erika, Inc., 456 U.S. 201, 211
n.14 (1982).  Indeed, "not only (is) existing law() read into
contracts in order to fix obligations as between the parties, but the
reservation of essential attributes of sovereign power is also read
into (the) contract() as a postulate of the legal order." Home
Building & Loan Ass'n v. Blaisdell, 290 U.S. 398, 435 (1934).  Cf.
United States Trust Co. v. New Jersey, 431 U.S. 1, 19-20 n.17 (1977).
Here, that existing law includes 42 U.S.C. 1304, which, as noted
above, expressly reserves Congress's right to alter or amend any
provision of the Act.  The parties to the agreement accordingly must
be deemed to have recognized that Congress was empowered to amend
Section 418 -- an action that necessarily would affect the validity of
the relevant provisions of existing agreements.  Because the agreement
at issue thus itself acknowledged Congress's authority to modify
Section 418, the 1983 amendment disturbed no settled rights.

   2. a. The district court's holding also cannot be squared with this
Court's usual approach to claims that contracts foreclose the
legislature's right to modify its social programs.  The Court has
explained that "sovereign power, even when unexercised, is an enduring
presence that governs all contracts subject to the sovereign's
jurisdiction." Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 148
(1982).  It has thus repeatedly held that "(c)ontractual arrangements
remain subject to subsequent legislation by the presiding sovereign *
* * unless (the sovereign's ability to enact such legislation) 'has
been specifically surrendered in terms which admit of no other
reasonable interpretation.'" Jicarilla Apache Tribe, 455 U.S. at
147-148 (quoting City of St. Louis v. United Rys., 210 U.S. 266, 280
(1908)).  /19/ See, e.g., United States Trust Co. v. New Jersey, 431
U.S. 1, 25 (1977);  New York Rapid Transit Corp. v. City of New York,
303 U.S. 573, 590-593 (1938);  Puget Sound Power & Light Co. v.
Seattle, 291 U.S. 619, 627 (1934);  Providence Bank v. Billings, 29
U.S. (4 Pet.) 514, 662 (1830).  Cf. Thorpe v. Housing Authority, 393
U.S. 268, 279 (1969) (a federal agency may impose upon a party with
whom it has a contract "an additional obligation not contained in the
contract" when "that obligation is imposed under (the agency's) wholly
independent rule-making power");  Horowitz v. United States, 267 U.S.
458, 461 (1925) ("the United States when sued as a contractor cannot
be held liable for an obstruction to the performance of a particular
contract resulting from its public and general acts as a sovereign").
And this is more than a convenient principle of construction:  it
serves to avoid the troublesome constitutional and public policy
questions posed when "one legislature, by (a) contract with an
individual, * * * restrain(s) the power of a subsequent legislature to
legislate for the public welfare." Boyd v. Alabama, 94 U.S. 645, 650
(1876).  See United States Trust, 431 U.S. at 45 (Brennan, J.,
dissenting).

   Yet there is absolutely nothing in the Section 418 agreement at
issue here (or, to our knowledge, in any other Section 418 agreement)
that purports to insulate appellees (or any participating state) from
the effects of legislative changes in the Social Security System.  The
document simply describes the employees who have been enrolled in the
System (J.A. 30, 34-35, 38, 39, 41, 42), and lists the rights and
obligations of the State under the agreement (J.A. 30-32, 35-36).
Thus, while it provides that the State "may terminate this agreement"
(J.A. 31), the document upon which the district court's opinion rests
nowhere guarantees -- or even suggests -- that Congress will not enact
supervening legislation that would obviate the agreement altogether by
requiring the states to participate in Social Security.  Indeed,
nothing in Section 418 itself authorizes the Secretary to enter into
agreements that contain such undertakings.  /20/

   The structure of the Act, moreover, again confirms that Congress
did not intend to "nonchalantly shed (the) vitally important
governmental power" (National Railroad Passenger Corp., slip op. 17)
to modify essential elements of the Social Security System -- and that
participating states could not reasonably have believed that Congress
meant to enter into such a bargain.  As noted above, the Act contains
an express reservation of congressional authority to modify any of the
Act's provisions.  And this Court repeatedly has noted that the
survival of the System requires

         flexibility and boldness in adjustment to everchanging
      conditions * * * .  It was doubtless out of an awareness of the
      need for such flexibility that Congress included in the original
      Act, and has since retained, a clause expressly reserving to it
      '(t)he right to alter, amend, or repeal any provision' of the
      Act.  * * * That provision makes express what is implicit in the
      institutional needs of the program.

Flemming v. Nestor, 363 U.S. 603, 610-611 (1960).  Cf. United States
Railroad Retirement Board v. Fritz, 449 U.S. 166, 174 (1980);
Hisquierdo v. Hisquierdo, 439 U.S. 572, 575 (1979);  Richardson v.
Belcher, 404 U.S. 78, 80-81 (1971).  It is hardly likely, then, that
Congress would have "abandoned its sovereign powers" (Jicarilla Apache
Tribe, 455 U.S. at 146) to adjust, through legislation, the Social
Security obligations of state and local emploeyrs.

   b. Against this background, it is beyond dispute that "the United
States possesses general regulatory power over appellee outside the
contractual relationship." FHA v. The Darlington, Inc., 358 U.S. 84,
98 (1958) (Harlan, J., dissenting).  In exercising this power -- as
the district court itself evidently recognized (J.S. App. 3a-4a) --
Congress could have ignored the outstanding agreements and simply
enacted new legislation permanently bringing into the Social Security
System those state and local government employees who already are
covered.  /21/ And if Congress retained the authority to take such
action, it seems absurd to suggest that the 1983 amendment is
constitutionally suspect because Congress achieved the same result by
modifying Section 418.

   The Court has applied precisely this reasoning in rejecting other
formalistic challenges to federal welfare legislation.  In Turner
Elkhorn Mining, for example, the statute at issue provided that coal
miners afflicted with complicated pneumoconiosis were "irrebuttably
presumed" to be totally disabled, and therefore entitled to be
compensated by their employers.  428 U.S. at 10-11.  The employers
challenged the constitutionality of this provision, asserting that its
use of an irrebuttable presumption violated their due process rights.
Id. at 23.  The Court, however, noted that Congress could have awarded
compensation to afflicted miners simply because their health had been
impaired, whether or not they were in fact totally disabled.  In these
circumstances, the Court explained, "the argument is essentially that
Congress has accomplished its result in an impermissible manner * * *
.  But in a statute such as this, regulating purely economic matters,
we do not think that Congress' choice of statutory language can
invalidate the enactment when its operation and effect are clearly
permissible." Id. at 23-24.

   Here, as the district court seemingly acknowledged (J.S. App.
3a-4a), the purpose and effect of the 1983 amendment -- guaranteeing
permanent Social Security coverage for state and local government
employees who already are participants in the System -- was a
self-evidently permissible one.  See note 21, supra.  And the
legislative history indicates that Congress believed that it was,
"(a)s an operational matter" (Turner Elkhorn Mining, 428 U.S. at 22),
exercising its regulatory authority to modify the Social Security
System when it amended Section 418(g).  Congress made no reference to
the abrogation of contractual rights;  instead, it declared flatly
that it was "prohibit(ing) State and local governments from
terminating (Social Security) coverage for their employees." H.R. Rep.
98-25, supra, at 19;  S. Rep. 98-23, supra, at 5.  See S. Rep. 98-13,
98th Cong., 1st Sess. 99-100 (1983).  That Congress found it most
efficacious to take this step by making existing agreements
nonterminable, rather than by, in terms, expanding the mandatory
coverage of the System, cannot have independent constitutional
significance:  "'The Constitution is "intended to preserve practical
and substantial rights, not to maintain theories."'" City of El Paso
v. Simmons, 379 U.S. 497, 515 (1965) (citations omitted).  /22/

 C. Congress Could Not Surrender Its Sovereign Authority to Modify The
Social Security System

   The district court concluded that its inquiry was at an end once it
determined that Section 418 agreements are contracts.  That
conclusion, as the discussion above explains, disregarded this Court's
views on the propriety of substituting semanticism for constitutional
analysis.  If the court below meant to hold that Section 418
agreements must be construed in a way that would prevent Congress from
making essential modifications in the Social Security System, however,
its decision is flawed for another reason:  such a holding cannot be
reconciled with this Court's repeated admonition that federal and
state "governmental powers cannot be contracted away." North American
Commercial Co. v. United States, 171 U.S. 110, 137 (1898).

   1. From the earliest days of the Republic, the Court has made it
plain that the property clauses of the Constitution -- the Taking, Due
Process, and Contract Clauses -- do not require the federal or state
governments "to adhere to * * * contract(s) that surrender() an
essential attribute of (their) sovereignty." United States Trust, 431
U.S. at 23.  See id. at 46-49 (Brennan, J., dissenting).  /23/ Thus,
"the exercise of the police power cannot be limited by contract for
reasons of public policy * * * and it is immaterial upon what
consideration the contracts rest, as it is beyond the authority of the
State * * * to abrogate this power so necessary to the public safety."
Northern P. Ry. v. Minnesota ex rel. Duluth, 208 U.S. 583, 598 (1908).
 See Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 108-109 (1938).
This principle serves a compelling purpose:

         One of the fundamental premises of our popular democracy is
      that each generation of representatives can and will remain
      responsive to the needs and desires of those whom they
      represent.  Crucial to this end is the assurance that new
      legislators will not automatically be bound by the policies and
      undertakings of earlier days.

United States Trust, 431 U.S. at 45 (Brennan, J., dissenting).

   Against this background, the Court repeatedly has rejected
challenges to legislative action impairing or abrogating contractual
obligations that purported to restrict the government's right to
legislate for the public welfare.  See, e.g., Simmons, 379 U.S. at
508;  Pierce Oil Corp. v. City of Hope, 248 U.S. 498, 501 (1919);
Northern P. Ry., 208 U.S. at 597;  New Orleans Gas Light Co. v.
Drainage Comm'n, 197 U.S. 453, 460 (1905);  Chicago B. & Q. R.R. v.
Nebraska ex rel. Omaha, 170 U.S. 57, 72 (1898);  Butchers' Union Co.
v. Crescent City Corp., 111 U.S. 746, 751 (1884);  Stone v.
Mississippi, 101 U.S. 814, 817 (1880);  Beer Co. v. Massachusetts, 97
U.S. 25, 33 (1877).  See United States Trust, 431 U.S. at 23 n.20.
Cf. Horowitz, 267 U.S. at 461;  Pennsylvania Hospital v. City of
Philadelphia, 245 U.S. 20, 23-24 (1917);  Goszler v. Georgetown, 19
U.S. (6 Wheat.) 593, 597-598 (1821).  /24/ The Court has scrutinized
such action only to ensure that the challenged legislation involved a
legitimate exercise of "'the sovereign right of the Government to
protect the lives, health, morals, comfort and general welfare of the
people'" (Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 241
(1978) (citation omitted)), rather than the bald "repudiation" of a
contractual obligation.  Lynch v. United States, 292 U.S. 571, 580
(1934).  Cf. id. at 579 (legislation abrogating the government's
contractual obligations is not inconsistent with the Fifth Amendment
when "the action taken falls within the federal police power or some
other paramount power");  Simmons, 379 U.S. at 509 (Contract Clause
prevents states from adopting the repudiation of debts as a policy).
/25/

   On the other hand, the Court has recognized that this principle
does not affect a sovereign's authority to enter into binding
financial or "debt contracts." United States Trust, 431 U.S. at 24.
See id. at 24-25 n.22 (citing cases).  See generally United States v.
Standard Rice Co., 323 U.S. 106, 111 (1944).  The Court has explained
that such agreements -- which establish the government's "contractual
obligations when it enters financial or other markets" (Energy
Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400,
412-413 n.14 (1983)) -- do not involve "a compromise of the State's
reserved powers." United States Trust, 431 U.S. at 25.  /26/ The Court
accordingly has treated contracts of this sort as binding ones that
create property by the Fifth Amendment.  Lynch, 292 U.S. at 579.  /27/

   The cases in which the Court has invalidated congressional
legislation that abrogated contracts to which the federal government
was a party fall squarely within this second category.  In Lynch, for
example, the Court invoked the Taking and Due Process Clauses in
striking down legislation that effectively repudiated the government's
obligation to pay claims on its war risk insurance policies.  292 U.S.
at 579.  While these policies were not issued for profit (id. at 576),
they plainly were quasi-commercial undertakings that in no way
restricted the power of Congress to legislate for the general welfare.
 Indeed, the Court explained that there was no suggestion in Lynch
that Congress "abrogate(d) these contracts in the exercise of the
police or any other power." Id. at 580.  Instead, the Court concluded
that the legislation had been motivated by a simple intent to maintain
the government's credit by reducing its obligations, and held that
"(p)unctilious fulfillment of contractual obligations is essential to
the maintenance of the credit of public as well as private debtors."
Ibid.  In reaching this conclusion, the Court took pains to note that
federal contracts may be abrogated when "the action taken falls within
the federal police power or some other paramount power." Id. at 579
(footnote omitted).  As the Court has subsequently explained, Lynch
thus stands only for the proposition that "need for money is no excuse
for repudiating contractual obligations." United States Trust, 431
U.S. at 26 n.25.  See National Railroad Passenger Corp., slip op. 20
n.24 (characterizing Lynch as subjecting the contractual abrogation to
special scrutiny because it involved an attempt to "maintain the
credit of public debtors").  /28/

   2. If Section 418 agreements are contracts that must be construed
to foreclose the federal government from mandatorily enrolling
participating states in the System, they plainly fall within the first
category of contracts outlined above -- those that create no vested
rights because they purport to deny the government the authority to
take action essential to the general welfare.  Section 418 agreements
are not "purely financial" arrangements like revenue bonds (United
States Trust, 431 U.S. at 25).  Instead, they are the mechanism that
Congress used to provide welfare and insurance protection to millions
of workers.  If the agreements disable Congress from legislating in
this area, and thus from protecting a large portion of the workforce
against "the risks and uncertainties of advanced industrial society"
(H.R. Comm. Print 97-32, at 7), they plainly surrender --
impermissibly -- an essential attribute of federal sovereignty.

   The remaining question is whether the 1983 amendment involved a
bona fide attempt to legislate for the general welfare.  That issue is
easily resolved:  even a glance at the legislative history
demonstrates that the purposes of the 1983 amendment transcended the
sort of repudiation of commercial obligations that was at issue in
Lynch.  Ten years ago, Congress already was expressing concern that
the withdrawal of local government employees from the System would
"reduce the employees' overall benefit protection and lead to
increased dependency on others in the future." Senate Special Comm. on
Aging, 94th Cong., 2d Sess., Termination of Social Security Coverage:
The Impact on State and Local Government Employees 2 (Comm. Print
1976) (hereinafter cited as 1976 Sen. Comm. Print).  Since then,
Congress has noted repeated suggestions that participation in the
System be made mandatory for employees already covered by Section 418
agreements.  1976 Sen. Comm. Print 32;  1980 Sen. Comm. Print 78.  In
finally making that change, Congress enacted into law a recommendation
of the bipartisan National Commission on Social Security Reform.  See
S. Rep. 98-13, supra, at 88-89, 104.

   The 1983 amendment was designed to protect the interests of state
and local government employees while preserving public confidence in
the System as a whole.  Congress noted that local government employers
were withdrawing from the System "in significant numbers * * * for
reasons that appear to have more to do with reducing operating costs
than providing basic, adequate protection for all employees." H.R.
Rep. 98-25, supra, at 19.  See H.R. Comm. Print 97-32, at 12-13, 15,
16;  1980 Sen. Comm. Print 17.  Local retirement and insurance systems
created to replace Social Security could not, in the congressional
judgment, duplicate the features of Social Security that Congress
deemed essential:  the System covers virtually all risks, and provides
a cushion for periods of unemployment or employment at low wages.  See
H.R. Comm. Print 97-32, at 12;  1980 Sen. Comm. Print 24-25, 72-73,
81.  This circumstance created particular difficulties for employees
whose coverage had not vested at the time of termination, or who
change jobs frequently.  Because only Social Security offers
retirement protection that is fully "portable" from job to job, such
employees might never obtain Social Security benefits, despite having
made payments into the System, and would likely be left with
inadequate pension and insurance guarantees.  See H.R. Rep. 98-25,
supra, at 19;  S. Rep. 98-13, supra, at 99;  H.R. Comm. Print 97-32,
at 12-13;  1980 Sen. Comm. Print 46;  1976 Sen. Comm. Print 24.  /29/

   Conversely, Congress found that termination of coverage provided a
windfall to employees whose Social Security rights already had vested:
 they remained eligible for substantial benefits although they no
longer made payments into the System.  H.R. Rep. 98-25, supra, at 19;
S. Rep. 98-13, supra, at 99;  H.R. Comm. Print 97-32, at 6, 9-10, 15;
1980 Sen. Comm. Print 74.  /30/ This plainly inequitable situation led
to considerable resentment on the part of workers whose participation
in the System was mandatory, and who found themselves inheriting the
tax burden surrendered by employees whose rights in the System had
vested.  H.R. Rep. 98-25, supra, at 19;  H.R. Comm. Print 97-32, at
14.  And it bolstered Congress's conclusion that the "voluntary
coverage provision can be seen as an anomaly in the context of a
basically mandatory system." H.R. Rep. 98-25, supra, at 19.  See
generally S. Rep. 98-13, supra, at 90-91;  H.R. Comm. Print 97-32, at
4-5.  Congress's attempt to remedy that anomaly in the Nation's basic
insurance system plainly involved a legitimate exercise of "the
federal policy power or some other paramount power." Lynch, 292 U.S.
at 579.  See generally United States v. Lee, 455 U.S. 252, 258-259
(1982).

 D. Even If Section 418 Agreements Are Property, The 1983 Amendment
Did Not Effect A Taking Within The Meaning Of The Fifth Amendment

   The preceding sections of this brief demonstrate that the district
court erred in concluding that Section 418 agreements are property
that was taken by Congress when it enacted the 1983 amendment.  But
even granting the district court that point -- that is, even if
Section 418 agreements are enforceable contracts of a conventional
sort -- the court below nevertheless erred by disregarding this
Court's decisions on the validity of laws that affect pre-existing
contractual obligations.  Such contracts may well be property that is
entitled to constitutional protection.  The district court failed to
recognize, however, that not all "impairment(s)" of contracts are "of
constitutional dimension." National Railroad Passenger Corp., slip op.
20.  The impairment here (if one exists) plainly is not.

   The Court has indicated that contracts are property within the
meaning of the Taking Clause of the Fifth Amendment.  See United
States Trust, 431 U.S. at 19 n.16;  Thorpe v. Housing Authority, 393
U.S. 268, 278 n.31 (1969);  Lynch, 292 U.S. at 579.  Cf. Ruckelshaus
v. Monsanto Co., No. 83-196 (June 26, 1984), slip op. 12-15.  But as
the Court repeatedly has noted, "government regulation -- by
definition -- involves the adjustment of rights for the public good."
Andrus v. Allard, 444 U.S. 51, 65 (1979).  Thus, at least "where an
owner possesses a full 'bundle' of property rights, the destruction of
one 'strand' of the bundle is not a taking, because the aggregate must
be viewed in its entirety." Id. at 65-66.  See Penn Central, 438 U.S.
at 124, 130, 136-138.  While the Court has set no fixed formula to
determine when regulation crosses the permissible line and effects a
taking, it has identified three principal considerations that bear on
the question:  "'the character of the governmental action, its
economic impact, and its interference with reasonable
investment-backed expectations." Monsanto, slip op. 17 (quoting Prune
Yard Shopping Center v. Robbins, 447 U.S. 74, 83 (1980)).  See Penn
Central, 438 U.S. at 124.

   Here, nothing in the character of the legislation suggests a
taking.  To the contrary, there are special reasons for courts to be
particularly concerned about finding a taking where the property
affected by the challenged government action is a contract.  /31/
Contracts allocate future rights and responsibilities between private
-- or, as here, public -- entities.  Subjecting legislation affecting
such rights to excessive scrutiny might "effectively compel the
government to regulate by purchase" (Allard, 444 U.S. at 65 (emphasis
in original)), and thus preclude Congress from playing its role of
"adjusting the benefits and burdens of economic life." Penn Central,
438 U.S. at 124.  And it would permit persons to "remove their
transactions from the reach of dominant constitutional power by making
contracts about them." Norman v. Baltimore & O. R.R., 294 U.S. 240,
308 (1935).  See Legal Tender Cases, 79 U.S. (12 Wall.) 457, 549-552
(1870).  Cf. United States v. Security Industrial Bank, 459 U.S. 70,
75 (1982).  /32/

   At the same time, the economic effect of the challenged legislation
is not so great as to amount to a taking.  Cf. Thorpe, 393 U.S. at
278-280 & n.35.  State employers retain the principal benefit that led
them to enter into Section 418 agreements -- participation in the
Social Security System.  Nothing in the 1983 amendment changed the
nature of the ongoing relationship between employers and the federal
government.  And while termination no longer is possible, it is far
from clear that the ability to withdraw from the System was, at any
point, a significant part of the attraction of the Section 418
program.  To the contrary, as we explain above (at 20), the
termination provision received little attention when the Section 418
program was created, presumably because it was assumed that few groups
would seek to terminate coverage.  Indeed, in the program's first 13
years only four local government entities, representing a total of 48
employees, withdrew from the System (H.R. Comm. Print 97-32, at 26);
only one state (Alaska) ever has withdrawn its own employees from the
System (see id. at 1);  and the states have made no attempt to
withdraw the vast bulk of covered local government employees.  /33/

   Finally, the 1983 amendment did not work an impermissible
interference with "reasonable investment-backed expectations." It is
difficult to discern any investment on the part of appellees that is
frustrated by the elimination of Section 418's termination provision.
And given the power retained by Congress to enact changes in the
System as a whole (see pages 26-29, supra), any expectation on the
part of appellees that they would never be required to participate in
Social Security against their will cannot be deemed reasonable.  See
Monsanto, slip op. 17;  Webb's Fabulous Pharmacies, Inc. v. Beckwith,
449 U.S. 155, 161 (1980).  In these circumstances, the amendment to
Section 418(g) cannot be said to violate "the dictates of '"justice
and fairness."'" Allard, 444 U.S. at 65 (citations omitted).

                              CONCLUSION

   The judgment of the district court should be reversed.

   Respectfully submitted.

   CHARLES FRIED

      Solicitor General

   RICHARD K. WILLARD

      Assistant Attorney General

   KENNETH S. GELLER

      Deputy Solicitor General

   CHARLES A. ROTHFELD

      Assistant to the Solicitor General

   WILLIAM KANTER

   DOUGLAS LETTER

      Attorneys

   FEBRUARY 1986

   /1/ Benefits received by current retirees are financed not by their
past payments, but rather "by current workers paying social security
taxes -- each working generation pays for the benefits being paid to
the previous generation now retired." Subcomm. on Social Security of
the House Comm. on. Ways and Means, 97th Cong., 2d Sess., WCMP:
97-32, Termination of Social Security Coverage for Employees of State
and Local Government and Nonprofit Groups 4 (Comm. Print 1982).  The
System thus has a "'pay-as-you-go' financing structure." Ibid.

   /2/ Employees who were not covered in 1983 included approximately
2.4 million federal workers (who were protected by a separate federal
retirement program), more than 3 million employees of state and local
governments, and some 1 million employees of nonprofit organizations.
H.R. Rep. 98-25, supra, at 13.  A number of these workers have since
been brought within the System.  See note 10, infra.

   /3/ Section 418 originally permitted the extension of Social
Security coverage only to state employees who were not already
protected by a retirement system, while entirely excluding certain
types of public employees from the System (64 Stat. 515).  The Section
has since been amended to permit virtually all state and local
government employees to participate in Social Security.

   /4/ The Act creates an exception to this rule for state employees
who already are covered by a retirement system;  a majority of such
employees must agree to be covered by a Section 418 agreement.  42
U.S.C. 418(d)(3).

   /5/ Only five states -- Alaska, Maine, Massachusetts, Nevada, and
Ohio -- currently do not have their own employees enrolled in the
Social Security System.  See H.R. Rep. 98-25, supra, at 17.

   /6/ Only the states were given the authority to file notices of
withdrawal, although they were permitted to do so on behalf of local
governments;  Section 418 did not require a participating state to
consult with or inform affected employees before making a decision to
terminate coverage.  See H.R. Comm. Print 97-32, at 5.  Some limits on
the state's ability to terminate Section 418 agreements were imposed,
however:  the state could tender a termination notice for a given
coverage group only after the Section 418 agreement enrolling that
group in the System had been in effect for at least five years.  42
U.S.C. 418(g)(1)(A) and (B).  Once a group's coverage had been
terminated, that group could not be re-enrolled in the System.  42
U.S.C. 418(g)(3).

   /7/ Indeed, from 1950 through 1966, 23 public entities representing
a total of only 319 workers withdrew from the System, which at that
point covered well over 5 million state and local government
employees.  H.R. Comm. Print 97-32, at 25.

   /8/ Of these, 287 governmental units employing 104,000 persons were
scheduled to withdraw from the program at the end of 1983 (J.A. 61).

   /9/ Prior to this amendment, the Secretary was authorized to
terminate a Section 418 agreement upon finding that the state involved
was unable to comply with the agreement or with the Act.  42 U.S.C.
418(g)(2).  This provision was eliminated by the 1983 amendment.  The
amendment also permitted coverage groups that previously had withdrawn
to rejoin the System.  See Pub. L. No. 98-21, Section 103(a), 97 Stat.
71.

   /10/ Prior to 1983, employees of certain types of nonprofit
organizations were excluded from the Social Security System unless the
employing organization filed a certificate waiving its exemption from
the System.  42 U.S.C. 410(a)(8)(B).  Pursuant to such waivers,
approximately 80% to 90% of the 5.3 million employees of nonprofit
organizations participated in the System.  Like state governments,
however, nonprofit institutions were permitted to withdraw from the
System upon two years' notice, and in 1983 termination notices were
pending for 977 such organizations with 322,600 employees.  H.R. Rep.
98-25, supra, at 15.  In 1983, Congress accordingly made coverage for
such employees mandatory by including them within the Act's basic
definition of "employee." See Pub. L. No. 98-21, Section 102(a)(1), 97
Stat. 70.  At the same time, Congress provided that new federal
employees would be enrolled in the System.  Section 101, 97 Stat. 67.

   /11/ After executing its Section 418 agreement with the Secretary,
California enacted legislation permitting it to enter into agreements
with public agencies that wished to participate in the System;  these
entities were to contribute their share of contributions to the State,
and were to be permitted to withdraw from the System upon two years'
notice to the State.  Cal. Gov't Code Sections 22000-22603 (West 1980
& Supp. 1985).  See J.S. App. 5a-6a.  "(I)n effect, the public
agencies were permitted to withdraw only if the State could terminate
their enrollment, thus ending the State's own liability for the public
agencies' participation" (id. at 6a).

   At the time of the 1983 amendment to the Act, approximately 511,000
state and local government employees in California were covered by the
System.  The State did not seek to withdraw its own 100,000 employees
from the System.  J.A. 51.

   /12/ The court first ruled that it had jurisdiction, finding that
all of the appellees had standing and that the Anti-Injunction Act, 26
U.S.C. 7421(a), was inapplicable.  J.S. App. 11a-24a, 26a-28a.

   /13/ The court acknowledged that only the Secretary and California
were parties to the Section 418 agreement (J.S. App. 15a-18a), but
found that the public agency appellees were third party beneficiaries
of the agreement (id. at 21a).

   /14/ The court also "assumed (without deciding) that such an
imposition might pass constitutional muster even though the (Section
418) Agreement permits the State to withdraw from the contract.  In
such a case, the State's contractual right to withdraw would appear to
be unaffected (thus a Just Compensation claim might be avoided), but
the termination right would do the State no good since it would then
be under a statutory obligation to participate in the Program." J.S.
App. 3a-4a (emphasis in original).

   /15/ As we explained in our Jurisdictional Statement (at 9-10 n.9),
none of the POSSE plaintiffs were properly before the district court.
Because the court concededly did have jurisdiction to resolve
California's complaint, however, it had the authority to decide the
case.

   /16/ See, e.g., 7 U.S.C. 2011-2029 (Food Stamp Act of 1977);  20
U.S.C. 2701 et seq. (Elementary and Secondary Education Act of 1965);
49 U.S.C. App. 1601a, 1602-1605, 1608, 1610-1612 (Urban Mass
Transportation Assistance Act of 1970).

   /17/ Federal grant programs invariably make use of written plans
that describe the terms of state participation.  See, e.g., 7 U.S.C.
2020(d) and (e) (Food Stamp program);  42 U.S.C. 1396 and 1396a
(Medicaid program).  It has never been understood that the states, by
filing such plans with the federal government, accept an "offer" to
enter into a contract, and in that way foreclose Congress from making
prospective changes in the programs involved.

   /18/ For example, Section 418 describes the coverage groups that
may join the System, as well the special conditions pursuant to which
some of them will be admitted (e.g., 42 U.S.C. 418(c), (d) and (u));
it is hardly likely that Congress meant to foreclose itself from ever
legislating to exclude certain of these groups from Social Security,
or from imposing additional conditions (such as, perhaps, a
requirement of referenda among affected employees) prior to the
state's decision to terminate coverage.  Similarly, it would have been
extraordinary had Congress intended to deny itself the opportunity to
modify such matters as the terms on which administrative or judicial
review will be available (see 42 U.S.C. 418(s) and (t)) or the
penalties for late payment (see 42 U.S.C. 418(j)).  Cf. Bell v. New
Jersey, 461 U.S. at 777-778 n.3.

   /19/ In Jicarilla Apache Tribe, for example, the Tribe entered into
contractual arrangements with private parties, granting them rights to
oil and natural gas in tribal land in exchange for a specified fee.
See 455 U.S. at 135;  id. at 186 (Stevens, J., dissenting).  The Tribe
subsequently imposed a severance tax on oil and natural gas removed
from tribal land.  In response to an argument that the tax violated
the contractual arrangement by imposing additional requirements not
spelled out in the oil and gas leases, the Court held that the Tribe
had not contracted away its sovereign right to levy the tax, refusing
to find that "the Tribe has abandoned its sovereign powers simply
because it has not expressly reserved them through a contract" (id. at
146);  "(t)opresume that a sovereign forever waives the right to
exercise one of its sovereign powers unless it expressly reserves the
right to exercise that power in a commercial agreement turns the
concept of sovereignty on its head." Id. at 148.

   /20/ Conversely, neither Section 418 nor any individual agreements
contain a provision permitting the United States to terminate the
Social Security coverage of state and local government employees.  See
note 9, supra.  Yet if Congress were to eliminate the System
altogether, it is difficult to imagine that the federal government
would be obligated by the existing agreements to continue paying
Social Security benefits to those (and only to those) employees.  This
obviously suggests that the agreements were not intended to address
Congress's authority to enact legislation affecting state participants
in the System.

   /21/ Indeed, Congress took just this approach in extending
mandatory coverage to all employees of nonprofit organizations,
whether or not those organizations previously had participated in the
System voluntarily.  See note 10, supra.  In modifying Section 418(g),
Congress attempted to accommodate the states by using the somewhat
more limited approach of making participation in the System mandatory
only for state and local government workers who already are covered.
We note that Congress plainly acted rationally in distinguishing
between state and local government employees who currently are
participants in the System and those who are not.  Expanding coverage
to workers outside of Social Security would mean displacing existing
pension systems (H.R. Comm. Print 97-32, at 18), and would impose
double burdens on states or localities that currently operate
"pay-as-you-go" pension plans.  S. Rep. 98-13, 98th Cong., 1st Sess.
100 (1983).  Similarly, persons brought into the System by the states
voluntarily were, as a general matter, the ones most in need of Social
Security coverage.  See H.R. Rep. 98-25, supra, at 19;  H.R. Comm.
Print 97-32, at 5.  And the rights of employees currently making
Social Security payments may have vested;  permitting them to withdraw
may entitle them to benefits even though they no longer are paying a
portion of their wages into the System.  H.R. Rep. 98-25, supra, at
19;  pages 40-41, infra.  Congress thus has a compelling interest in
preventing movement in and out of the System.  See RoAne v. Mathews,
476 F. Supp. 1089, 1100 (N.D. Cal. 1977), aff'd, 604 F.2d 37 (9th Cir.
1979).  See generally The Darlington, 358 U.S. at 91 (citation
omitted) ("'(f)ederal regulation of future action based upon rights
previously acquired by the person regulated is not prohibited by the
Constitution'");  Heckler v. Mathews, 465 U.S. 728, 748 (1984);
Califano v. Webster, 430 U.S. 313, 321 (1977);  United States v.
Maryland Savings-Share Insurance Corp., 400 U.S. 4, 6 (1970).

   /22/ While Congress presumably could cure the semantic defect
identified by the district court through the enactment of a new
statute making state participation in the System mandatory, in the
interim several hundred thousand state and local government employees
would have lost their Social Security coverage.

   /23/ The Court offered an example of the application of this
doctrine in United States Trust:  "a revenue bond might be secured by
the State's promise to continue operating the facility in question;
yet such a promise surely could not validly be construed to bind the
State never to close the facility for health or safety reasons." 431
U.S. at 25.  See id. at 23 n.20.

   /24/ Many of these cases involved challenges to state legislation
brought under the Contract Clause, which does not apply to the federal
government.  See Pension Benefit Guarantee Corp. v. R.A. Gray & Co.,
No. 43-245 (June 18, 1984), slip op. 14 n.8.  But these decisions have
force outside the Contract Clause context;  the Court has made it
clear that legislation enacted for the general welfare that impairs a
state's contractual obligations should not be deemed to violate any
"property rights protected by the Federal Constitution." Northern P.
Ry., 208 U.S. at 597.  In any event, the Court repeatedly has
suggested that the Contract Clause imposes more rigorous restrictions
upon the states than the Fifth Amendment imposes on the federal
government (Gray, slip op. 15;  National Railroad Passenger Corp.,
slip op. 21 n.25).  It follows a fortiori that, if the Contract Clause
does not require the states to adhere to contracts that surrender
essential attributes of their sovereignty, the Fifth Amendment does
not impose such an obligation on the United States.  See notes 31, 32,
infra (addressing the relationship between the Fifth Amendment's
Taking and Due Process Clauses).

   It should be added that a government's right to exercise its
eminent domain powers to take a contract that is frustrating its
current policies (see United States Trust, 431 U.S. at 19 n.16) does
not suffice to preserve the government's sovereign prerogatives.  As a
practical matter, the substantial value of many contracts may
effectively foreclose the use of eminent domain -- a circumstance that
would permit one legislature to establish policy that cannot
realistically be modified in the future if subsequent legislatures
must regulate by purchasing outstanding contracts.  Cf. id. at 29
n.27.  And none of the Court's decisions in this area suggests that
persons challenging legislation that impairs state contracts may have
a valid taking claim.  Compare Simmons, 379 U.S. at 516-517, with id.
at 533-534 (Black, J., dissenting).  Cf. Pennsylvania Hospital, 245
U.S. at 22-23.  In any event, because the Court has reasoned that
contracts purporting to bind a state not to exercise its police powers
are made subject to an implied condition that the contracts may be
frustrated (see Brand, 303 U.S. at 108-109), such contracts do not
create property to be taken -- a conclusion that seems to follow from
this Court's oft-stated view that the power to exercise eminent domain
cannot be contracted away.  See Pennsylvania Hospital, 245 U.S. at
22-23.

   /25/ This principle only comes into play, of course, when
legislative actions modifying contractual obligations are challenged.
It obviously does not give executive officials license to repudiate
authorized contractual undertakings.

   /26/ "'The truth is, States and cities, when they borrow money and
contract to repay it with interest, are not acting as sovereignties.
They come down to the level of ordinary individuals.  Their contracts
have the same meaning as that of similar contracts between private
persons.'" United States Trust, 431 U.S. at 25 n.23 (citation
omitted).

   /27/ In the Contract Clause context, the Court has explained that
even commercial contracts may be impaired if the state action "is
reasonable and necessary to serve an important public purpose." United
States Trust, 431 U.S. at 25.  Because the "State's self-interest is
at stake" (id. at 26) when contracts of this sort are repudiated,
however, the Court has declined to defer absolutely to the
government's assessment that abrogation is in the public interest.
See National Railroad Passenger Corp., slip op. 20 n.24;  Energy
Reserves Group, 459 U.S. at 412-413 n.14.

   /28/ Perry v. United States, 294 U.S. 330 (1935), one of the Gold
Clause Cases, was decided on even narrower grounds.  That case
involved a challenge to legislation authorizing the redemption of
United States gold bonds in legal tender currency rather than in gold
dollars.  See id. at 347.  The Court held that the legislation could
not be squared with Art. I, Section 8, Cl. 2 of the Constitution,
which authorizes Congress to "borrow money on the credit of the United
States";  if Congress could repudiate its bond obligations, the Court
held, "the credit of the United States (would be) an illusory pledge"
(294 U.S. at 350).  See also id. at 353-354 (citing Amend. 14 Section
4 ("The validity of the public debt of the United States * * * shall
not be questioned")).  The holding in Perry therefore cannot be
applied outside its specific context.  See generally 294 U.S. at 361
(Stone, J., concurring);  United States Trust, 431 U.S. at 26 n.25.

   /29/ Congress explained that "(t)he employer may view the worker
who leaves after a relatively short time as a marginal employee for
whom he has little interest in providing attractive pension benefits.
Consistent with this view, most State government retirement systems
are designed to best serve long-term employees.  Yet from the point of
view of social policy, the employee who moves from job to job needs
basic social insurance protection as much as a worker who stays at one
job his entire career.  The interests of the employer who wishes to
retain career employees with a good benefit package may not be
consistent with overall social policy, or with the interests of all
his employees, both present and future." H.R. Rep. 98-25, supra, at
19.

   /30/ Employees who participate in the System for a set period
obtain a lifetime entitlement to retirement and medical benefits
(although entitlement to disability benefits terminates five years
after the employee withdraws from the System).  See 1980 Sen. Comm.
Print 4-5.  While retirement benefits are pegged to an average of
career earnings in the System, the formula "is unable to distinguish
between an individual with a short period of high earnings, and an
individual with a long period of low earnings." S. Rep. 98-13, supra,
at 102.  The System thus treats an employee who participated in Social
Security for only part of his career as though he had participated in
the System for a lifetime at low wages.  And because the Social
Security benefit formula is weighted towards persons with low incomes,
an employee who is enrolled in Social Security for only part of his
career obtains an advantage:  the Social Security benefit he receives
replaces a relatively high percentage of his covered earnings, while
he pays no Social Security tax at all on his uncovered earnings.  See
id. at 102-103.  Moreover, Medicare and spousal benefits are not
wage-related, and therefore are fully vested once an employee has been
covered for the minimum period.  H.R. Comm. Print 97-32, at 9-10.

   /31/ The Court has made it plain that a physical invasion is the
paradigm of a taking.  See, e.g., Loretto v. Teleprompter Manhattan
CATV Corp., 458 U.S. 419, 426-427 (1982).  Indeed, to our knowledge,
the Court has never held that federal legislation effected a taking of
a contract right.  Although the Court in Lynch identified the
contracts at issue as property within the meaning of the Taking
Clause, it evidently found the challenged legislation improper under
the Due Process Clause.  292 U.S. at 579.  We note that a taking claim
in the contract context currently is before the Court in Connolly v.
Pension Benefit Guaranty Corp., No. 84-1555.

   /32/ The Court has pointed to similar considerations in cases
involving due process challenges to federal legislation that impaired
pre-existing contracts, requiring the party asserting
unconstitutionality to demonstrate "'that the legislature has acted in
an arbitrary and irrational way.'" Pension Benefit Guaranty Corp. v.
R.A. Gray & Co., No. 83-245 (June 18, 1984), slip op. 10 (quoting
Turner Elkhorn Mining, 428 U.S. at 15).  See National Rail Passenger
Corp., slip op. 21, 25.

   /33/ While participation in Social Security may impose added
expense on state and local government employers, that circumstance in
itself plainly does not amount to a taking.  See Penn Central, 438
U.S. at 131.  Cf. Allard, 444 U.S. at 65-66;  Goldblatt v. Hempstead,
369 U.S. 590 (1962);  Hadacheck v. Sebastian, 239 U.S. 394 (1915).
That is particularly true of legislation, like the 1983 amendment,
that is designed to equalize the benefits and burdens of "'"doing
business in a civilized community"'" (Monsanto, slip op. 18 (citations
omitted)), and that may, as a result, be expected to confer "an
average reciprocity of advantage." Pennsylvania Coal Co. v. Mahon, 260
U.S. 393, 415 (1922).  See Penn Central, 438 U.S. at 147 (Rehnquist,
J., dissenting).