Opinion ID: 197501
Heading Depth: 2
Heading Rank: 3

Heading: Pension Plans as Contractual Obligations

Text: 18 The law governing the rights of members of public employee retirement plans varies greatly from state to state, and has not been the subject of federal regulation or harmonization. There is no modern Supreme Court case that provides guidance as to the rights public employees have to their pensions. Pennie v. Reis, 132 U.S. 464, 10 S.Ct. 149, 33 L.Ed. 426 (1889), stands for the proposition that public employee pension programs do not create vested rights against legislative modifications, and thus are gratuities that a state may freely revoke. See Pennie, 132 U.S. at 470-71, 10 S.Ct. at 151 (holding California's adjustment of a pension benefit plan for police officers did not constitute deprivation of property without due process). Although this gratuity approach has been rejected by most state courts, Pennie has never been explicitly overruled. See generally 60A Am.Jur.2d, Pensions and Retirement Funds, §§ 1620-29 (discussing the shift away from the gratuity approach toward the contract approach). Pennie has, however, been ignored as a precedent, perhaps because its dicta regarding public pension benefits arose in the context of a Due Process claim. 19 Although only two other circuits have addressed this question, state courts have generally viewed a public pension plan as creating implied-in-fact unilateral contracts. See McGrath, 88 F.3d at 17 (collecting cases). The Ninth Circuit in State of Nevada Employees Ass'n v. Keating, 903 F.2d 1223 (9th Cir.1990), agreed with the Nevada Supreme Court that the  'better reasoned view' recognizes that non-vested employees have contractual rights in pension plans 'subject to reasonable modification in order to keep the system flexible to meet changing conditions, and to maintain the actuarial soundness of the system.'  903 F.2d at 1227 (quoting Public Employees' Retirement Board v. Washoe County, 96 Nev. 718, 615 P.2d 972 (1980)). Thus the Ninth Circuit in Keating concluded that a Nevada law penalizing the withdrawal of pension contributions and thereby altering the previous law that contained no such penalty, violated the Contract Clause because it did not represent a reasonable modification of the pension plan. The court in Keating noted, however, that the state did not dispute that Nevada's statutes providing pensions for public employees created contractual obligations. See Keating, 903 F.2d at 1225-26. The Fourth Circuit also ignored the gratuity approach in the course of holding that legislative amendments to a North Carolina public employee disability benefit plan did not violate the Contract Clause because, under relevant state law interpretations of the statute, rights to benefits under the plan did not vest until retirement. See Kestler v. Board of Trustees of North Carolina Local Governmental Employees' Retirement Sys., 48 F.3d 800, 804 (4th Cir.1995) (no Contract Clause violation where plaintiff was not vested at the time of the effective date of the amendment). 20 These cases reflect the modern trend among state supreme courts, which is to protect pension rights on the theory that a state's promise of pension benefits represents an offer that can be accepted through the employee's performance--thus, a unilateral, implied-in-fact contract is created that is binding on the state. See generally Andrew Mackenzie, Spiller v. State: Determining the Nature of Public Employees' Rights to Their Pensions, 46 Me. L.Rev. 355, 357-59 (1994); Note, John J. Dwyer,  'Til Death Do Us Part: Pennsylvania's 'Contract' With Public Employees For Pension Benefits, 59 Temp. L.Q. 553 (1986). There is much disagreement on the details, however, under this unilateral contract approach. One widely held view is that at some point, public employees' contractual rights to pension benefits vest; after vesting, the state is contractually bound to honor its obligation to provide a pension without any further modifications or decreases in overall benefit levels. See, e.g., Petras v. State Bd. of Pension Trustees, 464 A.2d 894, 896 (Del.1983) (rights vest upon completion of minimum service requirement); Baker v. Oklahoma Firefighters Pension & Ret. Sys., 718 P.2d 348, 353 (Okla.1986) (same); Leonard v. City of Seattle, 81 Wash.2d 479, 503 P.2d 741, 746 (1972) (en banc) (same); Sylvestre v. State, 298 Minn. 142, 214 N.W.2d 658, 666-67 (1973) (rights vest at start of employment); Yeazell v. Copins, 98 Ariz. 109, 402 P.2d 541 (1965) (en banc) (same as Sylvestre ). Several states have provisions in their constitutions declaring that vesting occurs at the moment of public employment and barring any legislative modifications that retroactively reduce the accrued benefits of public employees. See, e.g., Alaska Const. art. XII, § 7; Haw. Const. art. XVI, § 2; Ill. Const. art. XIII, § 5; Mich. Const. art. IX, § 24; N.Y. Const. art. V, § 7. Several states follow a modified contract approach, which permits some unilateral legislative modifications of pension plans as long as the legislature offsets any new disadvantage with comparable new advantages, as seen from the point of view of the public employee. See, e.g., Singer v. City of Topeka, 227 Kan. 356, 607 P.2d 467, 475 (1980); Betts v. Board of Admin. of the Pub. Employees' Ret. Sys., 21 Cal.3d 859, 148 Cal.Rptr. 158, 161, 582 P.2d 614, 617 (1978) (en banc); Opinion of the Justices, 364 Mass. 847, 303 N.E.2d 320, 328 (1973). At least two state supreme courts, including Maine's, have declined to use the language of vesting in the course of upholding modifications to pension benefits at any time during the employment relationship. See Spiller v. State, 627 A.2d 513, 516 (Me.1993); Pineman v. Oechslin, 195 Conn. 405, 488 A.2d 803 (1985). The Connecticut Supreme Court in fact rejected the contract model altogether and indicated that public employees have a property interest in pension benefits that may not be arbitrarily confiscated by the state, under the Due Process Clause. Pineman, 488 A.2d at 809-810. 21 Although we have recognized the diversity of contract theories adopted by state courts--in particular the divergence of approaches with regard to when exactly binding rights to a certain level of retirement benefits vest--we have never chosen to adopt a particular approach to public pension rights. See McGrath, 88 F.3d at 16-18. 22 In McGrath, we noted that, as a general matter, pensions are viewed as a species of unilateral contracts, although there is considerable disagreement as to when rights in public pension plans vest, if at all. Id. at 17. But in the course of analyzing a Contract Clause challenge to certain amendments to the Rhode Island public employee retirement system, we eschewed participating in abstract contract theory in favor of performing a close analysis of the statutory provision at issue. Such an approach is wise, because the unmistakability doctrine mandates that we determine whether the challenged legislative enactment evinces the clear intent of the state to be bound to particular contractual obligations. It may well be that the variety of approaches adopted by state supreme courts reflect, in part, differences in the structure of the various state pension programs, and of the intention of the different state legislatures that created them. There is a danger, however, in adopting a theory of pension rights and subsequently forcing a given program to fit under it. Any given theoretical approach will make assumptions regarding the intent of legislatures to be bound, as well as the time at which vesting should occur, which may be contradicted by particular statutory provisions such as, for example, an express reservation of the right to revoke pension benefits. 7 When reviewing a particular enactment, therefore, we must suspend judgment and proceed cautiously both in identifying a contract within the language of a regulatory statute and in defining the contours of any contractual obligation. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. at 466, 105 S.Ct. at 1452. The district court's decision protects Maine public employees from benefit reduction once employees' rights are vested. Unfortunately, the line it drew between teachers who had and had not completed a minimum service requirement, cannot be justified on the basis of the Maine statute, which nowhere speaks of vesting as understood by the district court.