Opinion ID: 1614244
Heading Depth: 2
Heading Rank: 2

Heading: The nature of the employees' interest.

Text: 1. First of all, we abandon the notion that retirement benefits in the public sector are nothing more than a gratuity. In the past the gratuity theory may have been justified by the fact that promised benefits were insignificant in amount. See Note, Public Employee Pensions in Times of Fiscal Distress, 90 Harv.L.Rev. 992, 997 (1977). But times have changed. It is estimated that in 1942 less than half of the 3.2 million state and local government employees had some kind of a public retirement program, while by the 1960's about 75% of some 7 million public employees had such coverage. Cohn, Public Employee Retirement Plans  The Nature of the Employees' Rights, 1968 Ill.Law Forum 32, 33 n. 3. Since then pension coverage has increased while at the same time, particularly in the last two decades, increasing numbers of public employees are reaching retirement age and finding that pension funding is not always adequate to provide what has been promised. See, e.g., Fritz, The Growing Challenges of Providing Pensions to State and Local Civil Servants in an Aging Society, 3 Int'l J. of Pub.Adm. 405 (1981). In 1914, when public pension benefits tended to be nominal by today's standards and when governmental policy was more laissez faire, we quoted in Gibbs from an Illinois case that [a] pension is a bounty springing from the graciousness and appreciation of sovereignty. 125 Minn. at 177, 145 N.W. at 1077. Today, that language is at best quaint, and at worst, demeaning. Retirement plans are now an accepted and expected part of one's employment, whether public or private. To attract and retain good employees, employers need to provide competitive retirement programs. Employees in the public sector undertake employment, at times on less favorable terms than in the private sector, with the expectation that they will have a measure of security in their retirement years. As one commentator puts it: The universally recognized primary objectives of retirement plans are to enable the employer to attract better employees, to reduce turnover, to facilitate orderly retirement of older employees, to retain valuable employees who might seek more productive employment elsewhere, and, most importantly from the employee viewpoint, to assure a measure of income upon retirement adequate to allow the annuitant to live in reasonable security. These objectives, of increasing importance in private employment, are even more critical in government personnel policy as, with few exceptions, government cannot compete with private industry salary levels, and must rely heavily upon the equalizing factor of an attractive and liberal retirement plan. Cohn, Public Employee Retirement Plans  The Nature of Employees' Rights, 1968 Ill.Law Forum 32 at 40. We therefore expressly overrule Gibbs v. Minneapolis Fire Department Relief Ass'n, 125 Minn. 174, 145 N.W. 1075 (1914), and those cases which follow its holding, relying on the gratuity theory. 2. We think today a public employee's interest in a pension is best characterized in terms of promissory estoppel. This approach is presaged, to a degree, by our previous holdings using the contract approach, to which promissory estoppel is related. Thus, in Gorczyca v. City of Minneapolis, 174 Minn. 594, 598, 219 N.W. 924, 925 (1928), employing a contract approach, we held: [A pension or retirement allowance] is not a gratuity when the services are rendered while the pension or retirement relief statute is in force, so that the statute becomes a part of the contract of employment and contemplates such pension or allowance as part of the compensation for the services rendered. Then in Sylvestre v. State, 298 Minn. 142, 214 N.W.2d 658 (1973), we characterized the relationship between the state and its district court judges with respect to pensions as contractual. We there reasoned that the assumption of judicial office in response to the state's offer of a pension constitutes the commencement of performance by the judge of a unilateral contract and makes the state's offer binding subject to completion of the performance for the specified period of time. Sylvestre is, of course, different from this case in that it involved the pensions of district court judges, whose office has a constitutional basis and whose compensation cannot be constitutionally reduced during continuance in office. Sylvestre is nevertheless instructive in its use of a contract approach to define the pension interest of public employees. We do not think, however, that the conventional contract approach provides an appropriate analysis for public pensions generally. In jurisdictions which have adopted the contract approach, usually the state constitution or state statutes have expressly defined the pension relationship between the state and its employees as contractual. See, for example, Opinion of the Justices, 364 Mass. 847, 303 N.E.2d 320 (1973); Birnbaum v. New York State Teachers Retirement System, 5 N.Y.2d 1, 152 N.E.2d 241, 176 N.Y.S.2d 984 (1958). A conventional contract approach, with its strict rules of offer and acceptance, tends to deprive the analysis of the relationship between the state and its employees of a needed flexibility. See Note, Public Employee Pensions in Times of Fiscal Distress, 90 Harv.L.Rev. 992, 998 (1977). Nor do we think characterizing the pension interest as a kind of property right, as the retirement board here urges, is appropriate. To afford protection for a property interest, moreover, would involve an extension of the somewhat dubious doctrine of substantive due process. It is clear that the state and its political subdivisions, by legislation enacted by the state legislature, can make an offer or promise to its employees, and that with respect to a pension, it has done so. See Sylvestre. Part of the problem is that in making an offer the state may, at the same time, say that it is not creating any contract rights. Thus, Minn.Stat. § 353.38 (1982) of the Public Employees Retirement Association (PERA) provides, Nothing done under the terms of this chapter and acts amendatory thereof shall create or give any contract rights to any person   . See also Minn.Stat. § 354.07, subd. 8 (1980), the Teachers Retirement Association (No provision of this chapter shall create or give any contract rights to any person) and Minn.Stat. § 352.022 (1982), the Minnesota State Retirement System (No provision    shall create or give any contract rights to any person). With respect to the fund involved here, the Minneapolis Municipal Employees Retirement Plan, the statutory scheme is similar to that for judges' pensions in that it does not contain a disclaimer of contract rights. This raises the question of whether the unilateral contract analysis used in Sylvestre might not then be extended to this case. We do not, however, reach that question, nor need we decide at this time if promissory estoppel might not also apply to judicial pensions in a Sylvestre setting; it is enough for now that we find that promissory estoppel affords the appropriate analytic approach here. First of all, it should be noted that the statutory disclaimers of pension contract rights do more than simply reserve the state's right to amend or modify its contractual promise from time to time; instead, the disclaimers purport to deny the creation of any contract right at any time. If this is true, then the state's promise is illusory; it is dependent once again on the graciousness and appreciation of sovereignty (or the lack of it)  an archaic notion of a gratuity, which we have rejected. We do not think this is what the legislature intended. We think the legislature intended that public employees have a right to the offered pension, that this right is a protectable entitlement though subject to the paramount interest of the state to modify it in the public interest, but that this right is not to be defined by strict conventional contract principles. [2] It is in this context, which we think is realistic, fair and practical, that we decide to judge the state's promise by the doctrine of promissory estoppel. In Del Hayes & Sons, Inc. v. Mitchell, 304 Minn. 275, 283, 230 N.W.2d 588, 593 (1975), we explained that: Promissory estoppel is the name applied to a contract implied in law where no contract exists in fact. The effect of promissory estoppel is to imply a contract from a unilateral or otherwise unenforceable promise coupled by detrimental reliance on the part of the promisee. (Footnotes omitted.) In other words, promissory estoppel precisely applies where, as here, there are no contract rights. We have held, for example, that it applies where a promise is illusory. See Grouse v. Group Health Plan, Inc., 306 N.W.2d 114, 116 (1981). The Restatement (Second) of Contracts § 90 (1981) defines the doctrine as follows: A promise which the promissor should reasonably expect to induce action or forbearance on the part of the promissee   and which does induce such action or forbearance is binding if injustice can be avoided only by the enforcement of the promise. In the realities of the modern employment marketplace, the state reasonably expects its promise of a retirement program to induce persons to accept and remain in public employment, and persons are so induced, and injustice can be avoided only by enforcement of that promise. Promissory estoppel, like equitable estoppel, may be applied against the state to the extent that justice requires. See Mesaba Aviation Division v. County of Itasca, 258 N.W.2d 877, 880 (Minn.1977) (equitable estoppel applies against the state); Construction Supply Co. v. Bostrom Sheet Metal Works, 291 Minn. 113, 120, 190 N.W.2d 71, 75 (1971) (promissory estoppel is a doctrine based on reliance which courts may use in a proper case to prevent injustice). In applying promissory estoppel, two factors must be kept in mind: (1) What has been promised by the state? and (2) to what degree and to what aspects of the promise has there been reasonable reliance on the part of the employee? Not every promise in all its implications is necessarily enforceable under promissory estoppel. Estoppel applies only to avoid injustice. Here the state has not promised its employees any pension as a matter of contract right. What it has promised and what its employees have relied on, and what, therefore, the law will enforce, is a pension program, the terms of which are protectable subject to reasonable legislative modification from time to time. We now apply these principles to this case. In 1966 appellant Christensen voluntarily became a member of the contributing class of the fund. It was at this point, when he elected to become eligible for pension benefits, that the state was estopped from denying its promise to provide then-existing pension benefits prescribed by statute, subject to reasonable legislative modification upon Christensen's satisfaction of eligibility requirements. The statutes in effect at that time imposed a 15-year service requirement which Christensen proceeded to and thereafter did satisfy. In 1969 the legislature reduced the service requirement to 10 years. On January 4, 1974, Christensen left municipal service and at that time elected to receive his retirement benefits on a monthly basis rather than a lump sum. At no time while he was in municipal service did the legislature modify its promise of a pension by attempting to impose a minimum age requirement. Not until Christensen had completed the requirements specified for receipt of his pension and he had retired did the legislature attempt to modify its promise to Christensen by saying that he must now reach age 60 before he could receive any more monthly benefits. Under these circumstances, we hold that appellant Christensen has a protectable pension entitlement and that the state's promise of a pension to be paid when he retired, as defined by the statutes existing in January 1974, is binding on the state.