Title: State ex rel. Horvath v. State Teachers Retirement Bd.

State: ohio

Issuer: Ohio Supreme Court

Document:

THE STATE EX REL. HORVATH, APPELLANT, v. STATE TEACHERS RETIREMENT 
BOARD, APPELLEE. 
[Cite as State ex rel. Horvath v. State Teachers Retirement Bd. (1998), 83 Ohio 
St.3d 67.] 
Teachers — State Teachers Retirement System — Nature and extent of a 
contributor’s protected property rights in the STRS are determined solely 
by the statutes that govern the system — Public school teachers possess 
contract rights in any STRS benefit, when. 
1. 
Mandatory teacher contributions to the State Teachers Retirement System 
result from economic legislation designed to benefit retired and disabled 
public school teachers and their survivors and beneficiaries and, when 
placed in the fund, lose their character as private property.  Accordingly, the 
nature and extent of a contributor’s protected property rights in the State 
Teachers Retirement System are determined solely by the statutes that 
govern the system. 
2. 
Public school teachers do not possess contract rights in any State Teachers 
Retirement System benefit unless and until the benefit vests by operation of 
R.C. 3307.711. 
(No. 97-1197 — Submitted May 13, 1998 — Decided August 19, 1998.) 
APPEAL from the Court of Appeals for Franklin County, No. 96APE08-983. 
 
Appellant, Theodore Horvath, initiated this action for declaratory judgment, 
mandamus, and injunctive relief to recover interest on mandatory contributions to 
the State Teachers Retirement System (“STRS”) made by his wife, Sydney 
Horvath, while publicly employed as an art teacher between 1951 and 1964.  
Although Mrs. Horvath never resumed her career as a public school teacher, she 
left her contributions in the fund until her death at age fifty-nine in June 1989.  At 
the time of Mrs. Horvath’s death, R.C. 3307.651 had taken effect to permit the 
 
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crediting of interest on teacher contributions after August 31, 1959 only upon 
retirement, and only in the event that the sum of the account at retirement is a 
factor in determining the allowance. R.C. 3307.651(2) and (3).  Because Mrs. 
Horvath died before she became eligible to retire, the State Teachers Retirement 
Board (“STRB”) refunded Mr. Horvath only $4,540.51 — the sum of her 
contributions, with no interest.  Accordingly, Mr. Horvath calculates that R.C. 
3307.651(2) and (3) work to deny him interest in the amount of $29,435.55 
accrued on his wife’s contributions after August 31, 1959. 
 
Throughout these proceedings, Horvath has urged invalidation of R.C. 
3307.651(2) and (3) on grounds that those provisions (1) effect an unconstitutional 
taking under the Ohio and United States Constitutions, (2)  deny equal protection 
under the Ohio and United States Constitutions, (3) violate the Contract Clauses of 
the Ohio and United States Constitutions, and (4) impose contract provisions that 
are unfair and unconscionable.  In response, appellee, STRB, has refuted Horvath’s 
challenges and asserted affirmative defenses of equitable estoppel, waiver, and 
laches.  In the proceedings below, the common pleas and appellate courts upheld 
the statutory provisions against Horvath’s attacks.  The cause is now before this 
court pursuant to the allowance of a discretionary appeal. 
__________________ 
 
Theodore J. Horvath, pro se; Chattman, Gaines & Stern Co., L.P.A., 
Thomas C. Wagner and Sara J. Moore, for appellant. 
 
Betty D. Montgomery, Attorney General, Michael W. Gleespen and Kelly 
Igoe, Assistant Attorneys General, for appellee. 
__________________ 
 
COOK, J.  For the reasons stated below, we reject Horvath’s challenges to 
R.C. 3307.651 and determine that he is not entitled to post-1959 interest on his 
wife’s contributions. 
 
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I.  R.C. 3307.651(3) 
 
From the inception of this action, Horvath’s arguments have lumped 
together R.C. 3307.651(2) and 3307.651(3) and referred to them collectively as the 
“no interest” statute.  In this appeal, Horvath continues to assert that we should 
invalidate both statutory divisions.  Scrutiny of Horvath’s claims, however, reveals 
that only R.C. 3307.651(2) is truly at issue in this case. 
 
R.C. 3307.651(2) delays crediting of interest on STRS members’ 
accumulated contributions until retirement.  R.C. 3307.651(3) applies to retirees 
and provides that interest is credited to the retiree’s account only if the amount of 
the account at retirement is a factor in determining a retirement allowance.  
Because Horvath’s claim involves only the right of a beneficiary to a refund of 
interest earned on a member’s accumulated contributions under former R.C. 
3307.48(B) when the member dies before becoming eligible to retire, R.C. 
3307.651(3) is never placed in issue.  Accordingly, the remainder of this opinion 
analyzes only Horvath’s arguments with respect to R.C. 3307.651(2). 
II.  TAKINGS 
 
Horvath argues that R.C. 3307.651(2) results in an unconstitutional taking of 
private property in violation of the Fifth Amendment to the United States 
Constitution and Section 19, Article I of the Ohio Constitution.  Horvath likens 
STRB’s retention of the interest accrued on his wife’s mandatory STRS 
contributions to the “physical occupation of property” analyzed by the United 
States Supreme Court in Loretto v. Teleprompter Manhattan CATV Corp. (1982), 
458 U.S. 419, 434, 102 S.Ct. 3164, 3175, 73 L.Ed.2d 868, 882.  Accordingly, 
Horvath cites Penn Cent. Transp. Co. v. New York (1978), 438 U.S. 104, 124, 98 
S.Ct. 2646, 2659, 57 L.Ed.2d 631, 648, in urging that “it is inappropriate and 
unnecessary to examine the character or purpose of [R.C. 3307.651(2)] or its 
benefit to the public, economic impact on a teacher or interference with her 
 
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reasonable investment expectations or whether it fairly adjusts ‘the benefits and 
burdens of economic life to promote the common good.’ ” 
 
A review of the Supreme Court’s takings jurisprudence, however, 
demonstrates that the very factors Horvath wishes this court to ignore are those 
with the most relevance to his case.  Loretto is quite dissimilar to this case.  Loretto 
involved a permanent physical occupation of real property; state legislation 
permitted cable television carriers to permanently affix access lines and other 
facilities to apartment buildings and severely limited the landlords’ recompense for 
the intrusion.  Id., 458 U.S. at 422-425, 102 S.Ct. at 3168-3170, 73 L.Ed.2d at 873-
875.  Because governmental action involving permanent physical occupation of 
real property is of such a character as to itself carry the traditional takings inquiry, 
the Loretto court held that there was no reason to further analyze the public benefit 
of the governmental action or its impact on the property owner. Id. at 434-438, 102 
S.Ct. at 3175-3177, 73 L.Ed.2d at 881-884.  As we discuss below, the most 
important distinctions between Loretto and this case are that (1) the governmental 
action in this case is not a physical occupation of private property for its own use, 
and (2) ultimately, Mrs. Horvath possessed no property right to interest on her 
STRS contributions. 
 
At the outset, we think it necessary to announce the common purpose behind 
the United States and Ohio Takings Clauses.  Those constitutional guarantees are “ 
‘designed to bar Government from forcing some people alone to bear public 
burdens which, in all fairness and justice, should be borne by the public as a 
whole.’ ” Penn Cent. Transp. Co. v. New York, 438 U.S. at 123, 98 S.Ct. at 2659, 
57 L.Ed.2d at 648, quoting Armstrong v. United States (1960), 364 U.S. 40, 49, 80 
S.Ct. 1563, 1569, 4 L.Ed.2d 1554, 1561.  In conjunction with this design, “[a] 
‘taking’ may more readily be found when the interference with property can be 
characterized as a physical invasion by government, see, e.g., United States v. 
 
5
Causby, 328 U.S. 256 [66 S.Ct. 1062, 90 L.Ed. 1206] (1946), than when 
interference arises from some public program adjusting the benefits and burdens of 
economic life to promote the common good.” Penn Cent., 438 U.S. at 124, 98 
S.Ct. at 2659, 57 L.Ed.2d at 648. 
 
On this issue, we draw comparison to Connolly v. Pension Benefit Guar. 
Corp. (1986), 475 U.S. 211, 106 S.Ct. 1018, 89 L.Ed.2d 166.  In Connolly, the 
United States Supreme Court reasoned that legislation forcing an employer to fund 
its share of obligations incurred during voluntary association with a multiemployer 
pension plan did not constitute a taking.  In addressing the nature of the 
government action, the court noted that “the Government does not physically 
invade or permanently appropriate any of the employer’s assets for its own use.  
Instead, the Act safeguards the participants in multiemployer pension plans by 
requiring a withdrawing employer to fund its share of the plan obligations incurred 
during its association with the plan.  This interference with the property rights of 
an employer arises from a public program that adjusts the benefits and burdens of 
economic life to promote the common good and, under our cases, does not 
constitute a taking requiring Government compensation.” Id. at 225, 106 S.Ct. at 
1026, 89 L.Ed.2d at 179. 
 
Similarly, in this case, Mrs. Horvath’s contributions to the STRS were used 
to benefit STRS participants — a subset of the public that included her.  As we 
discuss later, STRS itself adjusts the benefits and burdens of providing public 
school teachers with retirement, death, and disability benefits among public school 
teachers and their employers.  While the state may derive an indirect benefit from 
this use in that the STRS benefits publicly employed school teachers, that indirect 
benefit does not equate with physical invasion or permanent appropriation of the 
assets of fund participants for its own use.  Accordingly, the analysis employed in 
 
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Loretto, involving a permanent physical occupation of real property, is inapposite 
to this case. 
 
Having rejected Horvath’s attempt to analogize this case to Loretto, we now 
turn to the traditional takings inquiry set forth by the court in Penn Cent.  Although 
the Penn Cent. court noted that the traditional takings inquiry requires an ad hoc 
analysis depending largely on the circumstances of a particular case, it listed the 
following factors as having particular significance: (1) the economic impact of the 
regulation on the claimant, (2) the extent to which the regulation has interfered 
with distinct investment-backed expectations, and (3) the character of the 
governmental action.  Id., 438 U.S. at 124, 98 S.Ct. at 2659, 57 L.Ed.2d at 648.  
We previously analyzed the character of governmental action in this matter as 
being similar to the economic legislation considered in Connolly and dissimilar to 
the physical invasion considered in Loretto, and now confirm that our analysis of 
that issue weighs against the finding of a taking.  Accordingly, we proceed to 
analyze the economic impact of the regulation on Mrs. Horvath and her 
investment-backed expectations in her STRS contributions. 
 
In analyzing the severity of the economic impact of R.C. 3307.651(2), we 
cannot discount, as does Horvath, the benefits that he and his wife could have 
received under the STRS had certain events occurred. See Connolly, 475 U.S. at 
225-226, 106 S.Ct. at 1026-1027, 89 L.Ed.2d at 179-180.  Instead, potential 
benefits unrealized by the Horvaths are nevertheless to be considered as offsetting 
the STRS’s ultimate adverse economic impact on the Horvaths.  For instance, had 
Mrs. Horvath lived to retirement age, she would have drawn a pension, based on 
her contributions or her final average salary or a minimum amount far exceeding 
her total contributions and accumulated interest. See former R.C. 3307.38(B) and 
(C) (providing alternative methods of calculating service retirement benefits), 143 
Ohio Laws, Part III, 4124-4125.  Moreover, STRS funded various benefits that 
 
7
either applied to Mrs. Horvath during her service as a public school teacher or that 
would become available to her upon retirement.  See, e.g., G.C. 7896-38 (disability 
benefits) and 7896-41a(b) (survivor benefits), 124 Ohio Laws 643 and 647; the 
versions of R.C. 3307.43 (disability benefits) and 3307.49(B) (survivor benefits) in 
effect during Mrs. Horvath’s period of service, e.g., 127 Ohio Laws 326 and 330; 
and the versions of R.C. 3307.38 (service retirement benefits), 143 Ohio Laws, 
Part III, 4124, R.C. 3307.40 (lump sum payment upon death), 143 Ohio Laws, Part 
III, 4125, R.C. 3307.405 (Medicare equivalent benefits), 136 Ohio Laws, Part I, 
1281, and R.C. 3307.49(A) (survivor benefits), 142 Ohio Laws, Part I, 1186, in 
effect on January 31, 1990 — the date that Mrs. Horvath would have become 
eligible for retirement.  Finally, in this case, any adverse economic impact is 
minimized by the option available to Mrs. Horvath when she left teaching to 
withdraw her contributions and invest that money on her own, and the ultimate 
refunding of Mrs. Horvath’s base contributions upon her death. R.C. 3307.46 (all 
versions); former R.C. 3307.48(B), 136 Ohio Laws, Part II, 2193 (in effect at the 
time of Mrs. Horvath’s death). 
 
In Mrs. Horvath’s case, failure to reach retirement age caused her potential 
STRS benefits to remain unrealized.  Nevertheless, Mrs. Horvath’s forfeiture of the  
interest earned on her contributions is not disproportionate to the benefits available 
to her under the plan, whether actually realized or not.  Thus, the second takings 
factor of the Penn Cent. test is not in Horvath’s favor. Compare Connolly. 
 
Finally, in considering the Horvaths’ reasonable investment-backed 
expectations, we note that, from R.C. 3307.651’s effective date in November 1965 
to R.C. 3307.80’s effective date in March 1997,1 teachers who did not meet the 
eligibility requirements for retirement were not entitled to interest on their 
contributions.  Nevertheless, it is for substantially this same period of time that 
Horvath argues interest should have accrued and been credited to his wife’s 
 
8
account.  Accordingly, the Horvaths’ expectations of receiving interest on STRS 
contributions did not reasonably continue after R.C. 3307.651 became effective. 
 
Moreover, courts construing the investment-backed expectation factor of the 
Penn Cent. triad have concluded that its purpose is “to limit recovery to owners 
‘who could demonstrate that they bought their property in reliance on a state of 
affairs that did not include the challenged regulatory regime.’ ”  (Emphasis 
added.)  Allen v. Cuomo (C.A.2, 1996), 100 F.3d 253, 262, quoting Loveladies 
Harbor, Inc. v. United States (Fed.Cir.1994), 28 F.3d 1171, 1177.  This conclusion 
seems grounded in the long-standing principle that “[n]o person has a vested 
interest in any rule of law entitling him to insist that it shall remain unchanged for 
his benefit.” New York Cent. RR. Co. v. White (1917), 243 U.S. 188, 198, 37 S.Ct. 
247, 250, 61 L.Ed. 667, 672.  As noted by one legal commentator, and cited with 
approval by the United States Supreme Court in Landgraf v. USI Film Prods. 
(1994), 511 U.S. 244, 270, 114 S.Ct. 1483, 1499, 128 L.Ed.2d 229, 255, fn. 24, 
“[i]f every time a man relied on existing law in arranging his affairs, he were made 
secure against any change in legal rules, the whole body of our law would be 
ossified forever.” Fuller, The Morality of Law (1964) 60. See, also, Branch v. 
United States (Fed.Cir.1995), 69 F.3d 1571, 1578.  Because the record contains no 
indication that the Horvaths possessed a reasonable investment-backed expectation 
to interest on STRS contributions made after August 1959, this factor also weighs 
against finding a taking. 
 
Having failed the Penn Cent. takings analysis, Horvath’s claim is not saved 
by his analogy to Webb’s Fabulous Pharmacies, Inc. v. Beckwith (1980), 449 U.S. 
155, 101 S.Ct. 446, 66 L.Ed.2d 358.  Unlike our previous takings discussion, 
which treated Mrs. Horvath’s mandatory contributions and the interest accrued 
thereon as a single, indivisible unit (see Phillips v. Washington Legal Found. 
[1998], 524 U.S. ___, ___, 118 S.Ct. 1925, 1937-1939, 141 L.Ed.2d 174, 193-196 
 
9
[Breyer, J., dissenting]), Horvath’s argument under Webb’s focuses solely on his 
wife’s property right to earned interest as an incident of ownership of the account 
set up in her name pursuant to R.C. 3307.19.  While Horvath’s argument supposes 
a constitutional property right to interest earned on the STRS contributions, 
Webb’s makes it clear that any property right to interest on contributions would 
have to be a product of some source independent of the federal Constitution, such 
as state law.  “ ‘[P]roperty interests ... are not created by the Constitution.  Rather, 
they are created and their dimensions are defined by existing rules or 
understandings that stem from an independent source such as state law ....’ Board 
of Regents v. Roth, 408 U.S. 564, 577 [92 S.Ct. 2701, 2709, 33 L.Ed.2d 548, 561] 
(1972).  But a mere unilateral expectation or an abstract need is not a property 
interest entitled to protection.”  Webb’s, 449 U.S. at 161, 101 S.Ct. at 451, 66 
L.Ed.2d at 364. 
 
The teacher’s savings fund of the STRS is much different from the 
interpleader fund considered in Webb’s.  The interpleader fund at issue in Webb’s 
was private property held for the ultimate benefit of Webb’s creditors.  To that 
fund, the court applied the “usual and general rule * * * that any interest on an 
interpleaded and deposited fund follows the principal and is to be allocated to those 
who are ultimately to be the owners of the principal.” Webb’s, 449 U.S. at 162, 101 
S.Ct. at 451, 66 L.Ed.2d at 365.  The Webb’s court rejected the suggestion that 
sums placed in the interpleader fund became “public money” upon deposit until 
they left the account, instead stressing that sums placed in the interpleader fund 
remained private property, despite the fact that creditors lacked an immediate right 
to its proceeds. See, also, Phillips, 524 U.S. at ___, 118 S.Ct. at 1930, 141 L.Ed.2d 
at 183-184 (noting that all the parties to that appeal agreed that the principal held in 
IOLTA trust accounts is the client’s “private property”).  Additionally, the Webb’s 
court was careful to note that the statute at issue was not one adjusting “ ‘the 
 
10
benefits and burdens of economic life to promote the common good.’ ” Webb’s, 
449 U.S. at 163, 101 S.Ct. at 452, 66 L.Ed.2d at 366, quoting Penn Cent., 438 U.S. 
at 124, 98 S.Ct. at 2659, 57 L.Ed.2d at 648. 
 
In contrast to the interpleader fund in Webb’s, mandatory teacher 
contributions to the STRS result from economic legislation designed to benefit 
retired and disabled public school teachers and their survivors and beneficiaries2 
and, when placed in the fund, lose their character as private property. See R.C. 
3307.03.  Grants made from STRS funds, including refunds drawn from the 
teachers’ savings fund pursuant to R.C. 3307.48(B) and 3307.46, constitute 
statutory benefits. See Kodish v. Pub. Emp. Retirement Bd. (1975), 45 Ohio 
App.2d 147, 153, 74 O.O.2d 167, 170-171, 341 N.E.2d 320, 324.  Accordingly, the 
nature and extent of a contributor’s protected property rights in the STRS are 
determined solely by the statutes that govern the system. See Crown v. 
Patrolmen’s Variable Supplements Fund Trustees (S.D.N.Y.1987), 659 F.Supp. 
318, 320, affirmed (C.A.2, 1987), 819 F.2d 47. 
 
Granted, funds held in the teachers’ savings fund superficially resemble 
personal annuities in that R.C. 3307.19 requires the STRB to maintain separate 
accounts for each contributing teacher, showing both the teacher’s contribution and 
interest accumulated thereon.  The overall STRS scheme, however, requires these 
records to be kept only for purposes of calculating the benefits defined in R.C. 
Chapter 3307 that are granted upon retirement, death, disability, or voluntary 
withdrawal upon cessation of teaching. 
 
R.C. 3307.651(2) and 3307.711 combine to credit interest on contributors’ 
accounts upon retirement in order to calculate the retiree’s retirement allowance, 
annuity, or pension.  Former R.C. 3307.48(B) created a statutory right in favor of 
Mr. Horvath to have his wife’s contributions refunded to him upon her death.  By 
operation of R.C. 3307.651(2), however, that right did not include interest accrued 
 
11
on Mrs. Horvath’s contributions.  Because neither Mrs. Horvath as a member of 
STRS nor Mr. Horvath as her beneficiary ever possessed a vested property right to 
interest accrued on her STRS contributions, there was no taking under our state or 
federal Constitutions. 
III.  EQUAL PROTECTION 
 
Horvath proposes that the unequal treatment by R.C. 3307.651(2) of teachers 
who retire and those who do not violates the Equal Protection Clauses of the 
United States and Ohio Constitutions.  Horvath does not argue the presence of a 
suspect class or fundamental right, but simply argues that there is no rational basis 
supporting the disparate treatment of retirees and nonretirees. We disagree. 
 
As stated in State ex rel. Nyitray v. Indus. Comm. (1983), 2 Ohio St.3d 173, 
175, 2 OBR 715, 717, 443 N.E.2d 962, 964, “[e]qual protection of the laws 
requires the existence of reasonable grounds for making a distinction between 
those within and those outside a designated class.  The ‘reasonableness’ of a 
statutory classification is dependent upon the purpose of the Act.” (Citations 
omitted.)  The makeup of the classes identified by Horvath is itself telling.  
Eligibility for retirement is based on an aggregate of two factors: age and service 
time.  Accordingly, classification of members into groups of retirees and 
nonretirees furthers the apparent purpose of STRS of protecting elderly and long-
serving public school teachers with adequate retirement benefits. 
 
Because the statutes set apart retirees as a class that STRS is chiefly 
designed to benefit, it logically follows that nonretirees will not be entitled to the 
same treatment.  When the legislature moved STRS from a defined-contribution 
plan toward a defined-benefit plan, the nature of the system changed to guarantee 
benefit levels upon retirement — shifting the investment risk away from the 
individual contributor.3  In order to help fund guaranteed benefit levels, the 
legislature opted to reduce the benefits of those who fail to qualify for retirement 
 
12
by refunding to the contributor or beneficiary only accumulated contributions, 
without crediting interest on those contributions.  Former R.C. 3307.46, former 
R.C. 3307.48, and R.C. 3307.651. 
 
“[L]egislation may impose special burdens upon defined classes in order to 
achieve permissible ends.  But the Equal Protection Clause does require that, in 
defining a class subject to legislation, the distinctions that are drawn have ‘some 
relevance to the purpose for which the classification is made.’ ”  Rinaldi v. Yeager 
(1966), 384 U.S. 305, 309, 86 S.Ct. 1497, 1499-1500, 16 L.Ed.2d 577, 580, 
quoting Baxstrom v. Herold (1966), 383 U.S. 107, 111, 86 S.Ct. 760, 763, 15 
L.Ed.2d 620, 624.  Classifications having a reasonable basis do “not offend the 
Constitution simply because the classification ‘is not made with mathematical 
nicety or because in practice it results in some inequality.’ ”  Dandridge v. 
Williams (1970), 397 U.S. 471, 485, 90 S.Ct. 1153, 1161, 25 L.Ed. 491, 501-502, 
quoting Lindsley v. Natural Carbonic Gas Co. (1911), 220 U.S. 61, 78, 31 S.Ct. 
337, 340, 55 L.Ed. 369, 377.  Because a rational basis underlies disparate treatment 
of public school teachers who meet retirement eligibility and those who do not, 
there is no equal protection violation. 
IV.  CONTRACT CLAIMS 
A.  Contract Clauses 
 
Next, Horvath argues that R.C. 3307.651(2) creates an unconstitutional 
impairment of contract in violation of Clause 1, Section 10, Article I of the United 
States Constitution and Section 28, Article II of the Ohio Constitution.  Again, we 
disagree. 
 
Essentially, Horvath argues that, at the time Mrs. Horvath started working, 
the STRS created a contractual obligation to pay interest on her STRS 
contributions that could not later constitutionally be altered by statute.  In 
analyzing whether a statute violates the Contract Clause, “[g]enerally, we first ask 
 
13
whether the change in state law has ‘operated as a substantial impairment of a 
contractual relationship.’ ”  Gen. Motors Corp. v. Romein (1992), 503 U.S. 181, 
186, 112 S.Ct. 1105, 1109, 117 L.Ed.2d 328, 337, quoting Allied Structural Steel 
Co. v. Spannaus (1978), 438 U.S. 234, 244, 98 S.Ct. 2716, 2722, 57 L.Ed.2d 727, 
736.  “This inquiry has three components: whether there is a contractual 
relationship, whether a change in law impairs that contractual relationship, and 
whether the impairment is substantial.” Romein, 503 U.S. at 186, 112 S.Ct. at 
1109, 117 L.Ed.2d at 336. 
 
In determining whether a contractual relationship exists in the first instance, 
we are mindful that a state legislative enactment may be deemed a contract for 
purposes of the Contract Clause only if there is a clear indication that the 
legislature has intended to bind itself in a contractual manner. Natl. RR. Passenger 
Corp. v. Atchison, Topeka & Santa Fe Ry. Co. (1985), 470 U.S. 451, 465-466, 105 
S.Ct. 1441, 1451, 84 L.Ed.2d 432, 445-446.  Accordingly, we begin with a 
presumption that, absent a clearly stated intent to do so, statutes do not create 
contractual rights that bind future legislatures. Id.  Courts have coined the phrase 
“unmistakability doctrine” for this legal principle. See, e.g., McGrath v. Rhode 
Island Retirement Bd. (C.A.1, 1996), 88 F.3d 12, 19, citing United States v. 
Winstar Corp. (1996), 518 U.S. 839, 116 S.Ct. 2432, 135 L.Ed.2d 964.  The 
requirement inherent in the unmistakability doctrine that “ ‘the government’s 
obligation unmistakably appear thus serve[s] the dual purposes of limiting 
contractual incursions on a State’s sovereign powers and of avoiding difficult 
constitutional questions about the extent of state authority to limit the subsequent 
exercise of legislative power.’ ”  Parker v. Wakelin (C.A.1, 1997), 123 F.3d 1, 5, 
quoting United States v. Winstar Corp., 518 U.S. at 875, 116 S.Ct. at 2455, 135 
L.Ed.2d at 991.  The unmistakability doctrine is useful not only in determining 
whether a contractual relationship exists, but also in “defining the contours” of any 
 
14
contractual obligation that is found to exist.  Atchison, 470 U.S. at 466, 105 S.Ct. at 
1452, 84 L.Ed.2d at 446. 
 
Our early cases categorized pensions granted to public servants as mere 
gratuities, which were not to be equated with contractual rights.  Accordingly, 
pension boards were free to modify pension awards, provided that modifications 
were done reasonably and not arbitrarily. Mell v. State ex rel. Fritz (1935), 130 
Ohio St. 306, 309, 4 O.O. 320, 321-322, 199 N.E. 72, 73.  In State ex rel. Cunat v. 
Trustees of Cleveland Police Relief & Pension Fund (1948), 149 Ohio St. 477, 
481-482, 37 O.O. 143, 145, 79 N.E.2d 316, 318, however, the court acknowledged 
that enactment of the “vested right” statutes placed pensions granted to public 
servants covered by a firemen’s pension fund or a police relief fund in the category 
of unilateral contracts that, upon conditions fulfilled, ripen into a contractual right 
to a pension. 
 
In 1955, the legislature added vesting language to the STRS similar to that 
contained in the vested rights statutes considered in Cunat by enacting R.C. 
3307.711 as part of Am.H.B. No. 744, 126 Ohio Laws 1047.  By its terms, R.C. 
3307.711 vests a right to a retirement allowance, annuity, or pension at the time 
that benefit is granted by the STRB at the rate fixed by law when the benefit is 
conferred.  Accordingly, under R.C. 3307.711, a right does not become vested until 
it is granted, and only grants of retirement allowances, annuities, and pensions give 
rise to vested rights.  R.C. 3307.711 does not reach refunds of accumulated 
contributions under R.C. 3307.48(B) or R.C. 3307.46. 
 
Outside of R.C. 3307.711, there is nothing in any version of the Act evincing 
an intent on the part of the General Assembly to bind itself contractually to STRS 
participants.4  Moreover, there is nothing in the language of any of our statutes or 
our state Constitution creating a vested or contractual right to defined STRS 
 
15
benefit levels upon commencement of public employment, or barring legislative 
modification of benefits prior to vesting under R.C. 3307.711.5 
 
We recognize that other states have found the deferred-compensation aspect 
of a public pension to implicitly require vesting of the right to a pension at fixed 
and definite benefit levels upon acceptance of employment. See, e.g., Betts v. Bd. 
of Administration of Pub. Employees’ Retirement Sys. (1978), 21 Cal.3d 859, 863, 
148 Cal.Rptr. 158, 161,  582 P.2d 614, 617;  Sylvestre v. Minnesota (1973),  298 
Minn. 142, 155-156, 214 N.W.2d 658, 666-667; Yeazell v. Copins (1965), 98 Ariz. 
109, 402 P.2d 541.  Applying the unmistakability doctrine, however, we are unable 
to conclude that our legislature intended to confer contractual rights upon STRS 
participants aside from those that have vested by operation of statute.  Compare 
Spiller v. Maine (Me.1993), 627 A.2d 513, 515-517 (statutes establishing pension 
benefits for state employees did not create contractual rights, and, thus, legislative 
modifications of prospective retirement benefits for state employees did not violate 
state and federal Contract Clauses); Pineman v. Oechslin (1985), 195 Conn. 405, 
414, 488 A.2d 803, 808 (retirement Act did not create vested contractual rights in 
favor of state employees before they became eligible for pensions, since there was 
no clear expression by legislature that the Act was intended to create such rights).  
Accordingly, consistent with our earlier opinions on the subject, we conclude that 
public school teachers do not possess contract rights in any STRS benefit unless 
and until the benefit vests by operation of R.C. 3307.711.  See Petras v. State Bd. 
of Pension Trustees (Del.1983), 464 A.2d 894, 896.  We therefore hold that R.C. 
3307.651(2) does not violate our state or federal Contract Clauses. 
B.  Conscionability 
 
Horvath seeks to avoid application of R.C. 3307.651(2) by arguing that it is 
an unconscionable or unfair adhesion contract provision and therefore should be 
voided.  In our previous discussion, we established that a contractual relationship 
 
16
between Mrs. Horvath and the state regarding the STRS never came into being, 
and further that any contractual rights or obligations that could arise out of R.C. 
3307.711 would not extend to the right to a refund of a STRS participant’s 
accumulated contributions under R.C. 3307.48(B), R.C. 3307.46, or any of those 
provisions’ predecessors.  Accordingly, there is no need to further analyze R.C. 
Chapter 3307 as a contract or its individual provisions as contract terms. 
V.  CONCLUSION 
 
Because Horvath fails to demonstrate that R.C. 3307.651(2) suffers a 
constitutional infirmity or constitutes an unconscionable or unfair adhesion 
contract term, we affirm the judgment of the court of appeals. 
Judgment affirmed. 
 
MOYER, C.J., RESNICK, F.E. SWEENEY and LUNDBERG STRATTON, JJ., 
concur. 
 
DOUGLAS, J., concurs in judgment only. 
 
PFEIFER, J., dissents. 
FOOTNOTES: 
1. 
In 1996, the General Assembly enacted R.C. 3307.80, effective March 31, 
1997, as part of Am.Sub.H.B. No. 586, mandating payment of interest on 
members’ accumulated contributions in the event of death or withdrawal from the 
system before vesting.  Appellant does not argue that R.C. 3307.80 applies to his 
situation, nor does this appeal involve a claim regarding disparate treatment of 
those who receive the benefit of R.C. 3307.80 and those who do not. 
2. 
Economic legislation related to the welfare of employees, including pension 
funds for public employees, is granted favored status under Section 34, Article II 
of the Ohio Constitution, which states: “Laws may be passed fixing and regulating 
the hours of labor, establishing a minimum wage, and providing for the comfort, 
health, safety and general welfare of all employes; and no other provision of the 
 
17
constitution shall impair or limit this power.”  Pursuant to this provision, our court 
has upheld the creation, administration, management and control of public pension 
funds against wide-ranging constitutional attacks.  See State ex rel. Bd. of Trustees 
of Police & Firemen’s Pension Fund v. Bd. of Trustees of Police Relief & Pension 
Fund (1967), 12 Ohio St.2d 105, 41 O.O.2d 410, 233 N.E.2d 135. 
3. 
The 1951 amendment effected by Am.Sub.S.B. No. 96, 124 Ohio Laws 640, 
added a minimum benefit limited by the final average salary to G.C. 7896-35, and 
the 1965 amendment to R.C. 3307.38 enacted in Am.Sub.H.B. No. 225, 131 Ohio 
Laws 712, allows retirees to receive the greater benefits calculated under 
alternative formulas: one based primarily on service credit and the member’s final 
average salary, the other based primarily on the member’s accumulated 
contributions. 
4. 
Horvath cites R.C. 3307.58 in arguing that a teacher has contract rights in 
the STRS.  That section provides: 
 
“Each employer, before employing any teacher to whom sections 3307.01 to 
3307.72, inclusive, of the Revised Code, applies, shall notify such person of his 
duties and obligations under such sections as a condition of his employment. 
 
“Any such appointment or reappointment of any teacher in the public day 
schools of the state, or service upon indefinite tenure, shall be conditioned upon the 
teacher’s acceptance of such sections, as part of the contract.” 
 
That section, however, incorporates only the duties and obligations that R.C. 
Chapter 3307 imposes upon public school teachers into the teachers’ individual 
employment contracts.  It does not unmistakably bring the entire STRS scheme 
within the employment contract. 
5. 
A number of states have provisions in either their constitutions or statutes 
vesting public employees with their pensions upon commencement of their 
employment and barring legislative modifications that retroactively reduce public 
 
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employees’ accrued benefits.  Parker, 123 F.3d at 7 (listing Alaska Constitution, 
Section 7, Article XII; Hawaii Constitution, Section 2, Article XVI; Illinois 
Constitution, Section 5, Article XIII; Michigan Constitution, Section 24, Article 
IX; New York Constitution, Section 7, Article V; Opinion of the Justices [1973], 
364 Mass. 847, 860, 303 N.E.2d 320, 327).