1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-27-1998

Local 290 v. SEPTA

Precedential or Non-Precedential:

Docket 96-1760

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Recommended Citation

"Local 290 v. SEPTA" (1998). 1998 Decisions. Paper 122.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/122
Filed May 27, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

NO. 96-1760 

TRANSPORT WORKERS UNION OF AMERICA, LOCAL 

290, BY AND THROUGH ITS GUARDIAN AD LITEM, 

NICHOLAS R. FABIO; LEONARD F. BROWNA; 

WILLIAM HAGGERTY, 

Appellants 

v. 

SOUTHEASTERN PENNSYLVANIA TRANSPORTATION 

AUTHORITY; SOUTHEASTERN PENNSYLVANIA 

TRANSPORTATION AUTHORITY RETIREMENT PLAN FOR 

SUPERVISORY, ADMINISTRATIVE AND 

MANAGEMENT EMPLOYEES 

On Appeal From the United States District Court 

For the Eastern District of Pennsylvania 

(D.C. Civil Action No. 96-cv-00814) 

Argued October 14, 1997 

BEFORE: STAPLETON, ALITO and ROSENN, 

Circuit Judges 

(Opinion Filed May 27, 1998) 

 Alaine S. Williams (Argued) 

 Catherine M. Reisman 

 Willig, Williams & Davidson 

 1845 Walnut Street 

 24th Floor 

 Philadelphia, PA 19103 

 Attorneys for Appellants 
 J. Freedley Hunsicker, Jr. (Argued) 

 Michael D. Homans 

 Drinker, Biddle & Reath 

 1345 Chestnut Street 

 Philadelphia National Bank Building 

 Philadelphia, PA 19107-3496 

 Attorneys for Appellees 

OPINION OF THE COURT 

STAPLETON, Circuit Judge: 

Plaintiffs Transport Workers Union of America, Local 290 

("Transport Workers"), Leonard F. Browna, and William 

Haggerty instituted this action against Southeastern 

Pennsylvania Transportation Authority ("SEPTA") and

SEPTA's Retirement Plan for Supervisory, Administrative 

and Management Employees ("SAM Plan"). Plaintiffs claim 

that defendants violated the Contract Clauses of the United 

States and Pennsylvania Constitutions by modifying the 

SAM Plan in August 1995 to require, as a condition of 

participation, a contribution of employee earnings to the 

Plan. On cross-motions for summary judgment, the district 

court granted defendants' motion and denied plaintiffs' 

motion. This appeal followed. We will affirm. 

I. 

SEPTA was created pursuant to the Metropolitan 

Transportation Authorities Act of August 14, 1963 ("MTA 

Act") and is the sponsor of the SAM Plan, which was

established by SEPTA in 1965 and covers approximately 

2,300 supervisory and management-level employees. SEPTA 

was authorized to establish the SAM Plan by the MTA Act, 

which provides that: 

 There shall be established and maintained by the 

 authority a pension and retirement system to provide 

 for payments when due under such system or as 

 modified from time to time by resolution of the 

 [authority's] board. For this purpose, both the board 

 and the participating employees shall make such 

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 periodic payments to the established system as may be 

 determined by resolution. 

74 Pa. Cons. Stat. Ann. S 1724(c). 

Prior to the events giving rise to this litigation, the SAM 

Plan provided that SEPTA would "contribute . . . such 

amounts . . . as are required, in accordance with the 

funding policy established by the Board under the terms 

and conditions of [the] Plan, to fund the Benefits provided 

under [the] Plan." App. at A77. The Plan further provided 

that the "Board shall have the power, at any time and from 

time to time, . . . to modify, alter or amend the Plan and/or 

Master Trust in any manner which it deems desirable

provided that no amendment . . . may affect the rights, 

duties or responsibilities of the Trustee without its prior 

written consent." App. at A116. Prior to October 8, 1995, no 

employee contribution had been required of employees 

covered by the SAM Plan. 

Effective in December 1995, the SAM Plan was amended 

by the Board to require that employees covered by the Plan 

would contribute to it in the future .9% of their earnings up 

to the Social Security covered compensation level and 1.1% 

of their earnings above that level. The benefits provided by 

the Plan were not altered in connection with this 

amendment. The right to benefits vested as of December 

1995 was not affected but payment of the contribution in 

the future was a condition of accruing any additional 

benefits under the Plan. Simultaneously, the Board 

approved, effective October 1995, a three percent wage 

increase for the individual plaintiffs and others similarly 

situated. 

Plaintiffs' suit seeks declarative and injunctive relief from 

the employee contribution requirement. Their complaint 

asserts that the Board's amendment of the Plan, and the 

MTA Act under which it was authorized, both violate the 

Contract Clauses of the United States and Pennsylvania 

Constitutions. 

II. 

The United States Constitution provides, in relevant part, 

that "[n]o state shall enter into any . . . Law impairing the 

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Obligation of Contracts." U.S. Const. art. I, S 10. In order to 

prove a violation of this constitutional provision, a plaintiff 

must demonstrate that a "change in state law has `operated 

as a substantial impairment of a contractual relationship.' " 

General Motors Corp. v. Romein, 503 U.S. 181, 186 (1992) 

(quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 

234, 244 (1978)). Thus, Contract Clause analysis requires 

three threshold inquiries: (1) whether there is a contractual 

relationship; (2) whether a change in a law has impaired 

that contractual relationship; and (3) whether the 

impairment is substantial. See Romein, 503 U.S. at 186. If 

it is determined that a substantial impairment of a

contractual relationship has occurred, the court must 

further inquire whether the law at issue has a legitimate 

and important public purpose and whether the adjustment 

of the rights of the parties to the contractual relationship 

was reasonable and appropriate in light of that purpose. 

See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 

242-44 (1978); Nieves v. Hess Oil Virgin Islands Corp., 819 

F.2d 1237, 1243 (3d Cir. 1987). If the impaired contractual 

relationship is between private parties, the court will defer 

to the legislative judgment concerning the importance of the 

public purpose and the manner in which that purpose is 

being pursued. See Energy Reserves Group, Inc. v. Kansas 

Power & Light Co., 459 U.S. 400, 412-13 (1983). If the state 

is a party to the contract, "complete deference to a 

legislative assessment of reasonableness and necessity is 

not appropriate because the State's self-interest is at 

stake." United States Trust Co. v. New Jersey, 431 U.S. 1, 

26 (1977). 

The district court granted summary judgment for 

defendants on their federal constitutional claims because it 

concluded that the SEPTA resolution modifying the SAM 

Plan did not "constitute an exercise of legislative power," 

Op. at 11, and, accordingly, was not a "law" within the 

meaning of the Contract Clause. We find it unnecessary to 

decide this issue. We conclude that even if the Plan is 

regarded as establishing a contractual relationship and the 

Plan amendment is considered a "law," plaintiffs have failed 

to demonstrate that the contractual relationship has been 

"substantially impaired." 

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"Contracts enable individuals [and public entities] to 

order their . . . affairs according to their particular needs 

and interests. Once arranged, those rights and obligations 

are binding under the law, and the parties are entitled to 

rely on them." Allied Structural, 438 U.S. at 245. The 

purpose of the Contract Clause is to protect the legitimate 

expectations that arise from such contractual relationships 

from unreasonable legislative interference. Thus, we must 

determine whether there has been a substantial 

impairment of a contractual relationship by inquiring 

whether legitimate expectations of the plaintiffs have been 

substantially thwarted. We conclude that the Plan 

Amendment did not frustrate any legitimate expectation of 

the plaintiffs. 

Plaintiffs' argument that the MTA Act itself violates their 

rights under the Contract Clause need not detain us long. 

The only legitimate expectations plaintiffs have identified 

are those allegedly arising from the Plan. The Plan was 

adopted pursuant to the authority conferred by the MTA 

Act and, therefore, did not exist prior to its enactment. It 

necessarily follows that the MTA Act did not substantially 

impair any contractual expectations of the plaintiffs. 

Turning to the plaintiffs' expectations under the Plan, we 

first note that the Act by which it was authorized expressly 

contemplated that the provisions of any pension and

retirement system created thereunder would be subject to 

modification from time to time by the Authority's Board and 

that the employees covered might be required by resolution 

of the Board to make contributions. See 74 Pa. Cons. Stat. 

Ann. S 1724(c). The Plan itself also expressly provided that 

the Board was authorized to amend the terms of the Plan 

"in any manner which it deems desirable." App. at A116. 

Moreover, the Plan document contains an elaborate 

procedure for terminating the Plan. While the document 

evinces an intent to continue the Plan "indefinitely," it also 

reserves the right to "discontinue, suspend or reduce 

[SEPTA's] contributions [to the plan], or to terminate the 

Plan and/or Master Trust and/or any participating plan 

therein." App. at A117. The ability to reduce state

contributions or terminate the Plan entirely also supports 

the proposition that SEPTA reserves the right to alter the 

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scheme of funding embodied in the Plan. These provisions 

of the SAM Plan and the enabling statute give notice that 

the terms of the Plan are alterable by SEPTA and that an 

employee contribution may well be required as a condition 

of participation in the Plan. Under these circumstances, an 

employee's reasonable expectation from the Plan contract 

cannot include a guarantee that an employee contribution 

would never be required. 

In support of their contention that they did have 

legitimate expectations that were thwarted by the Board's 

amendment, plaintiffs rely primarily on the decision of the 

Supreme Court of Pennsylvania in Association of 

Pennsylvania State College and University Faculties v. State 

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

("APSCUF "). The plaintiffs there were covered by 

Pennsylvania's State Employees Retirement Fund, a 

statutory retirement program mandated for certain state 

employees. See 71 Pa. Cons. Stat. Ann. S 5301 et seq. The 

terms of that program were established in the statute. As 

originally adopted, the statute required an employee 

earnings contribution of 5% with the proviso that "in no 

case shall any member's rate . . . be greater than [the] 

contribution rate on the effective date of [the Code]." 

APSCUF, 479 A.2d at 963. The APSCUF litigation arose as 

a result of a subsequent legislative amendment to the 

statute that required an additional contribution from 

covered employees of 1.25% of their earnings. The "only 

effects [of the amendment were] to increase the contribution 

required by members and to save the Commonwealth one 

percent (1%) of its budgeted payroll. The dollar amount of 

retirement benefits remain[ed] the same; members [were] 

simply required to pay more for each pension dollar they 

[would] eventually receive." Id. at 964-65. The Supreme 

Court of Pennsylvania held that this amendment violated 

the Contract Clause of both the federal and state 

constitutions. 

Plaintiffs read APSCUF as establishing a rule that under 

the Contract Clause of the federal constitution, a public 

employee covered by a pension plan is entitled to the 

benefits existing at the time her employment commenced 

without regard to whether the employer has reserved the 

 6 
right to modify the plan at any time. If APSCUF established 

such a rule, we would not be bound by it. Whether a

contract was formed and what terms were included for 

purposes of the Contract Clause are federal questions. See 

General Motors Corp. v. Romein, 503 U.S. 181, 187 (1992). 

But we do not understand the Pennsylvania Supreme Court 

in APSCUF to be saying anything as novel as plaintiffs 

suggest. Contrary to plaintiffs' suggestion, that case does 

not hold that the terms of a public pension plan are 

irrelevant to a determination of whether rights protected by 

the Contract Clause have been substantially impaired. 

It is helpful to place APSCUF in historic perspective. In 

Penne v. Reis, 132 U.S. 464 (1889), the Supreme Court 

held that public employee pension programs constitute 

gratuities that a state may freely revoke. While Penne has 

never been expressly overruled, most state supreme courts 

subsequently rejected the "gratuity" approach in favor of an 

approach that viewed such programs as creating impliedin-fact unilateral contracts. See Parker v. Wakelin, 123 F.3d 

1, 6 (1st Cir. 1997). The modern trend in those courts has 

thus been to protect pension rights on the theory that a 

state's promise of pension benefits represents an offer that 

can be accepted by the employee's performance. See id. 

They have taken different views, however, regarding the 

point at which rights under public pension programs

become protected from change where no right to modify is 

expressly reserved by the employer. See, e.g. , Kestler v. 

North Carolina Local Gov't Employees' Retirement System, 

48 F.3d 800, 804 (4th Cir. 1995) (no contract rights prior 

to retirement); Petras v. State Bd. of Pension Trustees, 464 

A.2d 894, 896 (Del. 1983) (rights not subject to change 

after conditions for vesting under terms of plan satisfied); 

State of Nevada Employees Assoc., Inc. v. Keating, 903 F.2d 

1223, 1227 (9th Cir. 1990) (all employees have contract 

rights "subject to reasonable modification"); Oregon State 

Police Officers' Ass'n v. Oregon, 918 P.2d 765, 773 (Or. 

1996) (contract formed "on acceptance of employment or 

after a probationary period"); Booth v. Sims, 456 S.E.2d 

167, 184 (W. Va. 1995) (contract formed "after employees 

have substantially relied to their detriment"). 

"[P]ublic employee retirement benefits in Pennsylvania are 

viewed as being part of a contractual agreement between 

 7 
the public employer and the employee." Newport Township 

v. Margalis, 532 A.2d 1263, 1265 (Pa. Commw. 1987) 

(citing Wright v. Allegheny County Retirement Bd., 134 A.2d 

231 (Pa. 1957)). The terms of the contractual agreement in 

APSCUF did not include a reservation by the employer of a 

right to modify or terminate the plan. To the contrary, the 

terms of the plan specified a rate for the employees' 

contributions and expressly provided that that rate should 

not be exceeded. The court had no problem determining 

that the legislative amendment would constitute a Contract 

Clause violation for those employees who had accepted the 

state's unilateral offer by serving until the retirement 

eligibility requirements have been met. The more serious 

issue was whether the same was true with respect to those 

employees who had not satisfied those requirements. The 

court held that "non-vested state employees are entitled to 

the same constitutional protection as vested employees." 

APSCUF, 479 A.2d at 965. This conclusion was consistent 

with traditional contract principles; when an offeror invites 

an offeree to accept by rendering a performance a unilateral 

contract is formed when performance begins. See 

Restatement of Contracts (Second) S 45(1). 

The Supreme Court of Pennsylvania said nothing in 

APSCUF about whether state employees covered by a 

pension program expressly reserving the right to amend or 

terminate their rights have a legitimate contractual 

expectancy that can be substantially impaired for purposes 

of Contract Clause analysis. It would be inconsistent with 

traditional principles of contract law to simply ignore such 

a reservation. As the Restatement explains, the rule vesting 

unilateral contract rights at the beginning of performance 

"is designed to protect the offeree in justifiable reliance on 

the offeror's promise, and the rule yields to a manifestation 

of intention which makes reliance unjustified. A reservation 

of power to revoke after performance has begun means that 

as yet there is no promise and no offer." Restatement of 

Contracts (Second) S 45, Comment (b). 

As we have noted, the purpose of the Contract Clause is 

to allow parties to agree upon their respective rights and 

obligations and then to protect their expectations from 

legislative interference. Given this objective, we conclude 

 8 
that the Contract Clause should not be applied in a manner 

that would produce a result in direct conflict with the terms 

of the parties' bargain. 

As a matter of federal law, we are aware, of course, that 

ERISA statutorily prohibits modifications of benefits after 

they have accrued. We are also aware that the Court of 

Appeals for the First Circuit has recognized "an emergent 

common-law rule" that express reservations of the power to 

modify and terminate are ineffective as to those employees 

who have satisfied the plan requirements for retirement 

benefits. See McGrath v. Rhode Island Retirement Bd., 88 

F.3d 12, 18 (1st Cir. 1996) (collecting cases). We have 

found no case, however, holding that an express 

reservation of a right to modify is ineffective with respect to 

employees who have not satisfied the plan requirements for 

retirement benefits. It necessarily follows that we have 

found no case holding that the rights of such employees 

under the Contract Clause were violated by an exercise of 

such an express reservation. Indeed, the First Circuit Court 

of Appeals in McGrath held to the contrary, see 88 F.3d at 

20, and its conclusion is consistent with the other case law 

we have found dealing with reservations of the right to 

amend. See, e.g., City of Charleston v. Public Service 

Comm'n of West Virginia, 57 F.3d 385, 394 (4th Cir. 1995) 

(holding that a state law did not impair a public contract 

when the contract expressly stated that its terms were 

subject to legislative regulations); National Ass'n of Gov't 

Employees v. Commonwealth, 646 N.E.2d 106, 110-11 

(Mass. 1995) (collective bargaining agreement not impaired 

where legislature reserved power to determine employee 

health insurance contribution rate); Helicon Corp. v. 

Borough of Brownsville, 449 A.2d 118, 121 (Pa. Commw. 

1982) (cable television contract not impaired by city rate 

regulation where contract expressly contemplated legislative 

changes). 

In short, we conclude that SEPTA employees enrolled in 

the SAM Plan had no reasonable expectation when they 

joined the Plan that a contribution would not be required 

as a condition for future participation in the Plan.1 It 

_________________________________________________________________ 

1. Note further that the employee earnings contribution requirement is 

prospective in effect. See App. at A78. Thus, there is no allegation in 

this 

 9 
necessarily follows that there has been no violation of the 

Contract Clause of the federal Constitution. 

III. 

The Contract Clause of the Pennsylvania Constitution 

provides that "[n]o . . . law impairing the obligation of 

contracts . . . shall be passed." Pa. Const. art. I, S 17. We 

are, of course, bound to apply this provision in the same 

manner it would be applied by the Supreme Court of 

Pennsylvania. See United Mine Workers of America v. Gibbs, 

383 U.S. 715, 726 (1966). That court has held that it is 

generally to be applied in the same manner as its federal 

counterpart. See, e.g., First Nat'l Bank of Pennsylvania v. 

Flanagan, 528 A.2d 134, 135 n.1 (Pa. 1987). Based on this 

fact and APSCUF, we believe the Supreme Court of 

Pennsylvania would reach the same conclusions in this 

case with respect to the Pennsylvania Contract Clause as 

we have reached in the preceding section with respect to 

the federal Contract Clause. 

IV. 

The judgment of the district court will be affirmed. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

_________________________________________________________________ 

case that employees whose benefits under the Plan have fully vested will 

be affected by the addition of a contribution requirement. Cf. McGrath v. 

Rhode Island Retirement Bd., 88 F.3d 12, 20 (1st Cir. 1996) (rights under 

retirement plan with express reservation clause not subject to Contract 

Clause challenge until employees' rights have vested). 

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