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. e du/thir dc ir c uit_1998/122Filed 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 AppellantsJ. 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, Loca l 290 ("Transport Workers"), Leonard F. Browna, and Willi am Haggerty instituted this action against Southeaster n Pennsylvania Transportation Authority ("SEPTA") and SEPTA's Retirement Plan for Supervisory, Administra tive and Management Employees ("SAM Plan"). Plaintiffs c laim
that defendants violated the Contract Clauses of th e 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 di strict court granted defendants' motion and denied plainti ffs' 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 approximate ly 2,300 supervisory and management-level employees. S EPTA 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 a s modified from time to time by resolution of the [authority's] board. For this purpose, both the board and the participating employees shall make s uch

2periodic 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 . . . su ch amounts . . . as are required, in accordance with t he funding policy established by the Board under the t erms and conditions of [the] Plan, to fund the Benefits provided under [the] Plan." App. at A77. The Plan further pr ovided that the "Board shall have the power, at any time a nd from time to time, . . . to modify, alter or amend the P lan and/or Master Trust in any manner which it deems desirable provided that no amendment . . . may affect the rig hts, duties or responsibilities of the Trustee without i ts prior written consent." App. at A116. Prior to October 8, 1995, no employee contribution had been required of employee s covered by the SAM Plan.

Effective in December 1995, the SAM Plan was amende d by the Board to require that employees covered by t he Plan
would contribute to it in the future .9% of their e arnings up to the Social Security covered compensation level a nd 1.1% of their earnings above that level. The benefits pr ovided by
the Plan were not altered in connection with this amendment. The right to benefits vested as of Decem ber 1995 was not affected but payment of the contributi on in the future was a condition of accruing any addition al benefits under the Plan. Simultaneously, the Board approved, effective October 1995, a three percent w age increase for the individual plaintiffs and others s imilarly
situated.

Plaintiffs' suit seeks declarative and injunctive r elief from the employee contribution requirement. Their compla int 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 Pennsylva nia
Constitutions.

II.

The United States Constitution provides, in relevan t part, that "[n]o state shall enter into any . . . Law imp airing the

3Obligation 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 `o perated as a substantial impairment of a contractual relati onship.' " General Motors Corp. v. Romein, 503 U.S. 181, 186 ( 1992) (quoting Allied Structural Steel Co. v. Spannaus, 4 38 U.S. 234, 244 (1978)). Thus, Contract Clause analysis re quires three threshold inquiries: (1) whether there is a c ontractual relationship; (2) whether a change in a law has imp aired 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 mu st further inquire whether the law at issue has a legi timate and important public purpose and whether the adjust ment of the rights of the parties to the contractual rel ationship was reasonable and appropriate in light of that pur pose. See Allied Structural Steel Co. v. Spannaus, 438 U. S. 234, 242-44 (1978); Nieves v. Hess Oil Virgin Islands Co rp., 819 F.2d 1237, 1243 (3d Cir. 1987). If the impaired con tractual relationship is between private parties, the court will defer to the legislative judgment concerning the importan ce of the public purpose and the manner in which that purpose is being pursued. See Energy Reserves Group, Inc. v. K ansas 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 necess ity is not appropriate because the State's self-interest i s 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 b ecause it concluded that the SEPTA resolution modifying the S AM 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 unnecess ary to
decide this issue. We conclude that even if the Pla n is regarded as establishing a contractual relationship and the Plan amendment is considered a "law," plaintiffs ha ve failed to demonstrate that the contractual relationship ha s been "substantially impaired."

4"Contracts enable individuals [and public entities] to

order their . . . affairs according to their partic ular needs and interests. Once arranged, those rights and obli gations are binding under the law, and the parties are enti tled to rely on them." Allied Structural, 438 U.S. at 245. The purpose of the Contract Clause is to protect the le gitimate expectations that arise from such contractual relat ionships from unreasonable legislative interference. Thus, w e must
determine whether there has been a substantial impairment of a contractual relationship by inquiri ng whether legitimate expectations of the plaintiffs h ave been substantially thwarted. We conclude that the Plan Amendment did not frustrate any legitimate expectat ion of the plaintiffs.

Plaintiffs' argument that the MTA Act itself violat es their rights under the Contract Clause need not detain us long. The only legitimate expectations plaintiffs have id entified 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 enac tment. It necessarily follows that the MTA Act did not substa ntially impair any contractual expectations of the plaintif fs.

Turning to the plaintiffs' expectations under the P lan, 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 subje ct to modification from time to time by the Authority's B oard and that the employees covered might be required by res olution
of the Board to make contributions. See 74 Pa. Cons . Stat. Ann. S 1724(c). The Plan itself also expressly prov ided that
the Board was authorized to amend the terms of the Plan "in any manner which it deems desirable." App. at A 116. Moreover, the Plan document contains an elaborate procedure for terminating the Plan. While the docum ent
evinces an intent to continue the Plan "indefinitel y," it also reserves the right to "discontinue, suspend or redu ce [SEPTA's] contributions [to the plan], or to termin ate the Plan and/or Master Trust and/or any participating p lan therein." App. at A117. The ability to reduce state contributions or terminate the Plan entirely also s upports the proposition that SEPTA reserves the right to al ter the

5scheme of funding embodied in the Plan. These provi sions

of the SAM Plan and the enabling statute give notic e that the terms of the Plan are alterable by SEPTA and th at an employee contribution may well be required as a con dition of participation in the Plan. Under these circumsta nces, an employee's reasonable expectation from the Plan con tract cannot include a guarantee that an employee contrib ution would never be required.

In support of their contention that they did have legitimate expectations that were thwarted by the B oard's amendment, plaintiffs rely primarily on the decisio n 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 s tate employees. See 71 Pa. Cons. Stat. Ann. S 5301 et se q. The terms of that program were established in the statu te. As originally adopted, the statute required an employe e 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 Cod e]." APSCUF, 479 A.2d at 963. The APSCUF litigation aros e as a result of a subsequent legislative amendment to t he statute that required an additional contribution fr om covered employees of 1.25% of their earnings. The " only effects [of the amendment were] to increase the con tribution required by members and to save the Commonwealth on e percent (1%) of its budgeted payroll. The dollar am ount of retirement benefits remain[ed] the same; members [w ere] simply required to pay more for each pension dollar they [would] eventually receive." Id. at 964-65. The Sup reme Court of Pennsylvania held that this amendment viol ated

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 t he benefits existing at the time her employment commen ced without regard to whether the employer has reserved the

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

such a rule, we would not be bound by it. Whether a
contract was formed and what terms were included fo r purposes of the Contract Clause are federal questio ns. See General Motors Corp. v. Romein, 503 U.S. 181, 187 ( 1992). But we do not understand the Pennsylvania Supreme C ourt in APSCUF to be saying anything as novel as plainti ffs suggest. Contrary to plaintiffs' suggestion, that c ase does not hold that the terms of a public pension plan ar e irrelevant to a determination of whether rights pro tected by the Contract Clause have been substantially impaire d.

It is helpful to place APSCUF in historic perspecti ve. In Penne v. Reis, 132 U.S. 464 (1889), the Supreme Cou rt held that public employee pension programs constitu te gratuities that a state may freely revoke. While Pe nne has never been expressly overruled, most state supreme courts subsequently rejected the "gratuity" approach in fa vor of an approach that viewed such programs as creating impl iedin-fact unilateral contracts. See Parker v. Wakelin , 123 F.3d 1, 6 (1st Cir. 1997). The modern trend in those cou rts has thus been to protect pension rights on the theory t hat a state's promise of pension benefits represents an o ffer 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 modi fy is expressly reserved by the employer. See, e.g. , Kes tler v. North Carolina Local Gov't Employees' Retirement Sy stem, 48 F.3d 800, 804 (4th Cir. 1995) (no contract right s prior to retirement); Petras v. State Bd. of Pension Trus tees, 464 A.2d 894, 896 (Del. 1983) (rights not subject to ch ange after conditions for vesting under terms of plan sa tisfied); State of Nevada Employees Assoc., Inc. v. Keating, 903 F.2d 1223, 1227 (9th Cir. 1990) (all employees have cont ract rights "subject to reasonable modification"); Orego n 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 empl oyees have substantially relied to their detriment").

"[P]ublic employee retirement benefits in Pennsylva nia are viewed as being part of a contractual agreement bet ween

7the public employer and the employee." Newport Town ship

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 agree ment in APSCUF did not include a reservation by the employe r of a right to modify or terminate the plan. To the contr ary, the terms of the plan specified a rate for the employee s' contributions and expressly provided that that rate should not be exceeded. The court had no problem determini ng that the legislative amendment would constitute a C ontract Clause violation for those employees who had accept ed the state's unilateral offer by serving until the retir ement eligibility requirements have been met. The more se rious 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 ent itled to the same constitutional protection as vested employ ees." APSCUF, 479 A.2d at 965. This conclusion was consis tent with traditional contract principles; when an offer or invites an offeree to accept by rendering a performance a u nilateral 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 am end or terminate their rights have a legitimate contractua l expectancy that can be substantially impaired for p urposes of Contract Clause analysis. It would be inconsiste nt with traditional principles of contract law to simply ig nore such a reservation. As the Restatement explains, the rul e vesting unilateral contract rights at the beginning of perf ormance "is designed to protect the offeree in justifiable reliance on the offeror's promise, and the rule yields to a man ifestation of intention which makes reliance unjustified. A re servation of power to revoke after performance has begun mean s that as yet there is no promise and no offer." Restateme nt of Contracts (Second) S 45, Comment (b).

As we have noted, the purpose of the Contract Claus e is to allow parties to agree upon their respective rig hts and obligations and then to protect their expectations from legislative interference. Given this objective, we conclude

8that 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 benefi ts after they have accrued. We are also aware that the Court of Appeals for the First Circuit has recognized "an em ergent common-law rule" that express reservations of the p ower to modify and terminate are ineffective as to those em ployees who have satisfied the plan requirements for retire ment
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 wit h respect to employees who have not satisfied the plan requireme nts for retirement benefits. It necessarily follows that we have found no case holding that the rights of such emplo yees under the Contract Clause were violated by an exerc ise of such an express reservation. Indeed, the First Circ uit 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 righ t to amend. See, e.g., City of Charleston v. Public Serv ice Comm'n of West Virginia, 57 F.3d 385, 394 (4th Cir. 1995) (holding that a state law did not impair a public c ontract when the contract expressly stated that its terms w ere 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 i mpaired where legislature reserved power to determine emplo yee health insurance contribution rate); Helicon Corp. v. Borough of Brownsville, 449 A.2d 118, 121 (Pa. Comm w. 1982) (cable television contract not impaired by ci ty rate regulation where contract expressly contemplated le gislative changes).

In short, we conclude that SEPTA employees enrolled in the SAM Plan had no reasonable expectation when the y joined the Plan that a contribution would not be re quired as a condition for future participation in the Plan .1 It

___________________________________________________ ______________

1. Note further that the employee earnings contribu tion requirement is prospective in effect. See App. at A78. Thus, there is no allegation in
this

9necessarily follows that there has been no violatio n of the

Contract Clause of the federal Constitution.

III.

The Contract Clause of the Pennsylvania Constitutio n provides that "[n]o . . . law impairing the obligat ion of contracts . . . shall be passed." Pa. Const. art. I , S 17. We are, of course, bound to apply this provision in th e 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 f ederal counterpart. See, e.g., First Nat'l Bank of Pennsyl vania v. Flanagan, 528 A.2d 134, 135 n.1 (Pa. 1987). Based o n this fact and APSCUF, we believe the Supreme Court of Pennsylvania would reach the same conclusions in th is case with respect to the Pennsylvania Contract Clau se as we have reached in the preceding section with respe ct 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 h ave fully vested will be affected by the addition of a contribution requi rement. Cf. McGrath v. Rhode Island Retirement Bd., 88 F.3d 12, 20 (1st Ci r. 1996) (rights under retirement plan with express reservation clause not subject to Contract Clause challenge until employees' rights have veste d).

10