Opinion ID: 1796635
Heading Depth: 2
Heading Rank: 3

Heading: Modification of Public Pension Plans

Text: As previously pointed out, the Shelby County retirement and pension systems have undergone significant modifications and amendments on numerous occasions. As stated by the actuary who testified, revisions and modifications in such a plan are almost inevitably required. The initial structuring of such a plan is a complex matter. The actuary testified that almost every plan, at its inception, incurs an unfunded liability to employees entering it because of their years of prior creditable service existing at the date of inception, as to which years no contributions or funding had previously been made either by the employer or by the employees. The Shelby County plan, like many others, had such an unfunded liability at its inception and continues to have one because neither employee nor employer contributions have overcome that deficit. Further, when benefits were increased, both employer and employee contributions for the future were increased, but neither were made retroactive to cover past years of creditable service. It is clear from the record that all actuarial projections are estimates, based upon statistics, and these are necessarily subject to correction and revision as experience necessitates. It is, of course, in the interest both of the public and of the participating employees that a fund initially be structured on a sound actuarial basis and that it be kept on such a basis as it is administered through the years. Otherwise, as the actuary pointed out, the plan may become insolvent to the detriment of all of the remaining employees in it, or the requisite funding may become so exorbitant as to be beyond the means of the public employer. While we agree with the implicit holding of the courts below that a public employer may from time to time offer additional benefits which employees may accept expressly or by acquiescence, nevertheless we are not convinced that a plan is frozen against detrimental changes or modifications the moment an employee begins to participate in it, where such changes are necessary to preserve the fiscal and actuarial integrity of the plan as a whole. It seems to us that public policy demands that there be a right on the part of the public employer to make reasonable modifications in an existing plan if necessary to create or safeguard actuarial stability, provided that no then accrued or vested rights of members or beneficiaries are thereby impaired. This, in our opinion, is the announced public policy of this state through several legislative enactments. T.C.A. § 8-34-204, dealing with the Tennessee Consolidated Retirement System, provides as follows: Every provision of chapters 34 through 37 of this title shall be subject to amendment or repeal by any session of the general assembly, provided that no such amendment or repeal shall diminish or annul, in any respect, any right acquired by a member or beneficiary under the provisions of chapters 34 through 37 of this title. The Shelby County plan now under consideration is not part of the Tennessee Consolidated Retirement System. However, it is now subject to the provisions of T.C.A. § 3-9-101, establishing the Council on Pensions and Retirement. This council was organized in 1971. It was directed to develop and establish pension and retirement standards and a coherent state policy on pensions and retirement, grounded in progressive and fundamental principles; to study pension and retirement developments in other governments and in industry and business; to maintain a critical analysis of the federal social security program [4] and to (4) Appraise pension and retirement provisions in force in Tennessee from time to time, along with those in other states and recommend such changes as considered necessary or advisable in the state's laws; (5) Review proposals from other sources for changes in the state's laws and transmit recommendations concerning them to the General Assembly and the governor; (6) Submit suggested legislation or amendments to the General Assembly and governor for the purpose of carrying out its recommendations... . T.C.A. § 3-9-102. Whenever any proposed legislation is introduced in the General Assembly to establish a new pension or retirement system or to change an existing one, the proposal is to be referred to the Council and to a standing committee for study and recommendations. By Tenn. Public Acts 1981, chapter 137, officials of all local government retirement plans are required to report annually to the Council on the actuarial and financial status of each plan. It seems to us inescapable from these legislative provisions that the General Assembly considers that reasonable modifications may be made in public pension plans in order to keep them actuarially sound. While the initial Private Act of 1945 authorizing the Shelby County System did not expressly so provide, we think that this is implicit in the terms of the statute authorizing the Quarterly County Court to formulate and administer the plan. Appellees point to a 1955 amendment to the Private Act which provides as follows: Provided that the provisions of the Retirement and Pension System shall constitute vested interests between the members including retired beneficiaries and the County of Shelby. Tennessee Private Acts, 1955, ch. 197. An identical provision was passed by the same General Assembly respecting the pension plan of the City of Memphis. In the provisions of the 1945 Act, above referred to, notice was taken by the General Assembly that there were persons who were jointly employed by the city and county. In 1957 the charter of the City of Memphis was further amended by adding the following explanatory language to the provisions added in 1955: So that all of the assets of the retirement fund maintained for purposes of the retirement system of the City of Memphis shall, at all times, be used for the exclusive benefit of members (including retired members) of the retirement system of the City of Memphis, and their beneficiaries, as may be defined therein, and, in no event, shall the assets of the said retirement fund, or any part thereof, ever revert to the City of Memphis. Although the statutes pertaining to the Shelby County system were not amended in 1957 to correspond to changes made in the city charter, nevertheless it is shown in the record that the County has always administered the funds in accordance with the directive of the 1957 statute quoted above, and no county funds allocated to the retirement system have ever been withdrawn or diverted to other county purposes. In our opinion, the words vested interests used in the 1955 statutes pertaining to both the city and the county have the meaning which was elaborated upon and made express as to the city in the 1957 statute; that is, that employees had interests in the assets of the retirement system, [5] but not, as indicated by the Court of Appeals, in the precise clauses and terms of the plan as it existed at the inception of their employment, so as to render the same immutable and beyond necessary amendment by the governing body. Many varied and conflicting views have been taken in other jurisdictions as to the rights of public officers and employees who are within the coverage of a statutory pension system. See 60 Am.Jur.2d, Pensions and Retirement Funds §§ 46-50 (1972); Annot. 52 A.L.R.2d 437 (1957). The Court has been assisted by excellent and extensive briefs furnished by counsel for all parties, elaborating upon the rules developed in the great volume of litigation in this area. Counsel for appellees have urged the Court, if it does not accept the strict contractual theory followed by the Court of Appeals, to adopt an approach which accommodates employees' rights and the government's legitimate interest in flexibility, such as was used by the Chancellor. This rule, referred to in their briefs as a compromise rule, permits modifications which are reasonable, provided they are materially related to the soundness of the pension system and also provided that any disadvantages to employees are accompanied by comparable new advantages. This rule, sometimes referred to as the California rule, [6] is contrasted with the so-called Pennsylvania rule, which permits reasonable modifications when necessary to protect or enhance actuarial soundness of the plan, provided that no such modification can adversely affect an employee who has complied with all conditions necessary to be eligible for a retirement allowance. See Harvey v. Retirement Board of Allegheny County, 392 Pa. 421, 141 A.2d 197, 203 (Pa. 1958); see also Eisenberger v. Police Pension Comm'n of City of Harrisburg, 400 Pa. 418, 162 A.2d 347 (Pa. 1960). We are of the opinion that the Pennsylvania rule is preferable. It is more in accord with the public interest requiring a reasonable amount of flexibility on the part of the public employer and with the legislative policies referred to above. As pertinent to the present case, appellants agree that the 1977 modification of the retirement and pension system could not and should not be applied to employees who had at that time actually retired. They also agree in general that the modification cannot be applied detrimentally under the Pennsylvania rule to any employees who on September 1, 1977, were eligible to receive an allowance from the plan  in this instance, employees with ten years' creditable service. Appellants ask the Court to modify the Pennsylvania rule to provide that an employee who continued to earn and accrue benefits after September 1, 1977, would be subject, insofar as his future accruals are concerned, to the amended plan. Those employees, however, as of the effective date of the amendment, were eligible for retirement benefits on a base consisting of twelve months' earnings immediately prior to retirement. [7] We do not believe that this right should be or that it could validly be taken from them without their consent, even though they continued to be employed by the County and to accrue benefits in the future. The 1977 resolution had a lock-in provision, guaranteeing that no employee's benefit base could ever be less than the average twelve months' salary prior to the effective date of the amendment. It was felt that this provision would afford a measure of protection to employees then nearing eligibility for retirement. We are of the opinion, however, that neither the lock-in provision nor the new benefit base could be applied adversely to any employee who as of September 1, 1977, had at least ten years' creditable service in the system. As to employees who did not at that time have such eligibility, the new benefit base, subject to the lock-in clause, may properly be applied, since the evidence shows that it meets the requirements of the Pennsylvania rule. Judgment is rendered accordingly, and the cause is remanded to the trial court for any further orders or decrees which may be necessary. In view of the nature of the litigation, all costs, including those incident to the appeal, are taxed to appellants. COOPER, BROCK and DROWOTA, JJ., and DYER, Special Justice, concur.