Opinion ID: 1223840
Heading Depth: 3
Heading Rank: 1

Heading: The Constitutionality of AO 94-95

Text: Alaska Constitution article XII, section 7 protects accrued benefits of public employee retirement systems from diminution or impairment. [5] In granting summary judgment to the class and finding AO 94-95 violated Alaska Constitution article XII, section 7, the superior court held that the members of Plans I and II had a vested interest in the surpluses generated by their plans. It reached that conclusion given the historically distinct structure of the plans, the lack of notice to members of Plans I and II that a surplus would essentially be donated to subsidize contributions to a successor plan covering a distinct population of recent hires, and the APFRS Board's 1993 Statement of Investment Goal in which each plan's respective membership could expect that the benefits flowing from the increasing strength of each plan would be preserved for the benefit of the membership of that plan. The court further noted that even though Board recommendations are only advisory, it was unlikely the Assembly would ignore a recommendation to increase benefits. The court also recognized that it cannot be denied that the retention of surplus assets enhances the integrity of a plan, a condition clearly more favorable to its members than the dilution effected by AO 94-95. MOA argues that the accumulated surpluses in Plans I and II gave the members of those plans no accrued benefits, because the rights of plan members were determined when they enrolled, and the plans did not entitle the members to any distribution of accumulated surpluses. Instead, because Plans I and II were defined benefit plans whose benefits were guaranteed by MOA if employee contributions fell short, plan members could not reasonably expect to receive any portion of any accumulated surplus. MOA further argues that the superior court erred in relying upon the 1993 APFRS Statement of Investment Policy, which was not binding on MOA and created no rights beyond those specified in AMC 03.85. MOA asserts that the superior court's ruling that the class members had vested rights in the surpluses generated by their plans and the related possibility of increased benefits is inconsistent with the precedent established by this court. It concludes that AO 94-95 does not diminish or impair any accrued benefit. Hammond v. Hoffbeck, 627 P.2d 1052 (Alaska 1981), set out a framework for analyzing a claim alleging a violation of article XII, section 7 of the Alaska Constitution. [6] In Hoffbeck, we held that the right to benefits vests when the employee enrolls in the retirement system, rather than when the employee is eligible to receive the benefits. Id. at 1056-57. Changes in a system that operate to an employee's disadvantage by diminishing or impairing vested rights [7] must be offset by comparable new advantages, or the changes will run afoul of article XII, section 7. Id. at 1057 (citing Allen v. City of Long Beach, 45 Cal.2d 128, 287 P.2d 765, 767 (1955)). In Hoffbeck, amendments to the statutory scheme underlying the Alaska Public Employees' Retirement System (PERS) reduced members' occupational death and disability benefits, and excluded some persons who were previously eligible for disability benefits. Id. at 1053-54. We there held that the vested benefits protected by article XII, section 7 include not only the dollar amount of the benefits payable, but the requirements for eligibility [for benefits] as well. Id. at 1058. We next considered article XII, section 7 in Sheffield v. Alaska Public Employees' Ass'n, 732 P.2d 1083 (Alaska 1987). In Sheffield, members of the PERS retirement system challenged the PERS Board's adoption of new actuarial tables, which reduced the benefits received by early retirees. Id. at 1084. In holding that using the new actuarial tables violated the employees' constitutional rights, we made it clear that the benefits in force at the time of enrollment in the system will be protected, stating: [A member] is entitled to have the level of rights and benefits then in force preserved in substance in his favor without any modification downwards. ... When we speak of the level of rights and benefits protected by [this statute] we mean the practical effect of the whole complex of provisions. ... Id. at 1087 (quoting Opinion of the Justices, 364 Mass. 847, 303 N.E.2d 320, 327 (1973) (emphasis added)). Citing the quoted language, the parties now before us disagree over what constitutes the practical effect of the whole complex of provisions regarding the APFRS. The class contends that prior to AO 94-95 the practical effect of the whole complex of provisions was separate financial integrity and the prospect of increased benefits to each plan's membership from its own surplus generated from the investment of its own, separate, employer and employee contributions. In support, the class relies upon (1) the Board's 1993 investment goal of using income generated from investments of the funds to reduce contributions, increase benefits or both and (2) the separateness of the plans, i.e., their separate contribution rates, membership, and accounting. MOA, however, asserts that under Sheffield, benefits are defined as the practical effect of the statutory provisions in force at the time of enrollment and do not encompass possibilities that may exist. In support, MOA also cites Flisock v. State, Division of Retirement and Benefits, 818 P.2d 640 (Alaska 1991); Rice v. Rice, 757 P.2d 60 (Alaska 1988); and State v. Allen, 625 P.2d 844 (Alaska 1981). We held in Flisock that although an employee had the right to the benefits provided by statute when he enrolled in his retirement system, the employee had no vested right in the Retirement Division's mistaken application of the statutory provisions. 818 P.2d at 644 n. 5. We held in Rice that the use of a Qualified Domestic Relations Order (QDRO) to divide an employee spouse's pension benefits simply changed the method of distribution, and therefore did not impair vested rights because it did not reduce the dollar amount of monthly pension benefits. 757 P.2d at 62. The parties disagree about the effect of the discussion of vested rights in State v. Allen, 625 P.2d at 847-48 & n. 5 (quoting 3A A. Corbin, Corbin on Contracts § 626, at 10-11 (rev. ed. 1960)). Allen upheld the right of those enrolled in the Elected Public Officers' Retirement System (EPORS) to receive, upon retirement, the benefits promised under the EPORS statute although the statute was repealed by initiative only eight months after the statute was implemented. Id. at 849. Quoting Corbin, we distinguished between a vested right and an expectancy: [T]he existence of a contract right is not denied merely because the money is payable in the future and only on the happening of an uncertain event or because some one has a power of termination or modification. If a right has to be vested in order to be recognized and protected, these rights are vested. It is immaterial whether the parties expect or hope that payment will take place. Id. at 847-48 n. 5 (quoting Corbin, § 626, at 10-11). Relying on Allen, MOA argues that the prospect of a future increase of benefits is only an expectancy rather than a vested right because no increase was ever promised. The class argues that an enforceable promise can be for something other than the payment of money; it asserts that the promise could be to invest wisely the retirement assets with the understanding that the proceeds, while presently undetermined, may only be used to benefit those who made the initial investment. These three cases reaffirm the principle espoused in Hoffbeck, that an employee's right to retirement benefits vests upon his or her enrollment in the retirement system. MOA argues that under Alaska law, not all changes in a retirement system unconstitutionally diminish accrued benefits. We agree with that general proposition, but it does not resolve the question presented here. [8]
Our review of AMC 03.85 leads us to conclude that the APFRS treated the plans (as they were successively adopted) as distinct for all significant purposes. They had distinct contribution requirements (which became less favorable to the members of each newly added plan). [9] They provided distinct and different benefits to members of each plan. [10] Further, AMC 03.85.100(G) required an independent actuarial evaluation of Plans I and II every two years. [11] That provision cannot be read to allow a calculation of actuarial soundness including members of any other plan, including Plan III. A separate provision, AMC 03.85.210(A), required an annual actuarial valuation of Plan III ... to determine the contribution rate required to maintain the actuarial integrity of Plan III. Given these distinctions in contribution rates and benefits, and the explicit requirement for a separate actuarial evaluation for Plans I and II, it is not surprising that MOA and APFRS treated the plans as separate except for purposes of investing the assets: in the words of the consulting actuary, The System has historically been funded as three separate plans. The separate treatment of plan funding confirms the apparent scheme originally created by the enabling ordinance. Nothing about the APFRS before 1994 would have alerted newly enrolled plan members that their contributions might be used prospectively or retrospectively to fund one of the other plans. For example, had the investments for Plan I been extremely unsuccessful, Plan III members would have had no reason to expect when they enrolled that any surplus in Plan III might be used to remedy any deficiency in Plan I. Anchorage Municipal Code 03.85.210(A), which requires independent actuarial valuation of Plan III ... in order to determine the contribution rate required to maintain the actuarial integrity of Plan III, strongly implies otherwise. [12] MOA argues that because these are defined benefit plans, members have no right to share or reasonable expectation of sharing in any surplus created by overcontributions or investment success. The other side of that argument, however, is that before 1994, the enabling code provisions gave MOA no right to divert accumulations attributable to members of one plan for the benefit of members of a different plan. Likewise, members would have had no reason to think that the fruits of their own contributions might reduce the contributions of members of a different plan. Instead, a contrary expectation was reasonable: because the plans provided defined benefits, MOA was obliged to pay any deficiency. That obligation was inconsistent with requiring members of one plan to help remedy a funding deficiency in another plan. Similarly, provisions for separate valuations to calculate the contribution rates for each plan to maintain the actuarial integrity of Plan III, AMC 03.85.210(A), and Plans I and II as actuarially sound, AMC 03.85.100(G), render the defined benefit feature inconclusive. Consequently, whether or not members of Plans I and II expected when they enrolled to share in any surplus by an increase in benefits, they reasonably could have expected that the product of their contributions would be used for their ultimate benefit. Certainly they could not have expected that any surplus would be used for the benefit of non-plan members. To do what AO 94-95 would require would squarely conflict with AMC 03.85.100(G) with respect to Plans I and II. It would also implicitly conflict with the separation inherent in plans which have different contribution rates, different benefits, and different obligations. At the least, as the superior court observed, maintaining the separation among the funds enhances the integrity of a plan, a condition clearly more favorable to its members than the dilution effected by AO 94-95. Superior Court Order at 15 n. 14. MOA asserts that the surpluses contained in Plans I and II are excess to the needs of those plans. We note, however, that the actuaries' 1994 responses to an APFRS inquiry about the impact of combining the plans reveal that (depending upon assumptions regarding additional enrollments, suspension of Plan III contributions, and declines in investment returns) the funding for the combined system was reduced to either 102% or 99%. Consequently, combining the three plans clearly impaired the inherent integrity of Plans I and II. MOA argues that its obligation to guarantee the defined benefits makes any surplus irrelevant. MOA might as well argue that it could have altogether suspended its contributions, on the theory its probable future solvency would have permitted it to guarantee benefits even if the funds were not actuarially sound. We conclude that AO 94-95 unconstitutionally impairs the vested right of members of Plans I and II to have the actuarial soundness of those plans evaluated and maintained separately without being affected by the soundness of other plans. That failure impairs the ability of Plans I and II to withstand future contingencies, such as increases in plan obligations, declines in investment revenue and inability by MOA to fund any shortfall. It is therefore unconstitutional. Given that conclusion, we need not also consider whether the Board's 1993 Statement of Investment Policy gave rise to any rights which could be considered to have vested and which were impaired or diminished by AO 94-95.
MOA, citing cases from other jurisdictions, asserts that employees under a defined benefit pension plan have no constitutional right to the surpluses in their plans; it argues that the only vested right which cannot constitutionally be diminished or impaired is the receipt of the statutorily defined benefits. [13] See Poggi v. City of New York, 109 A.D.2d 265, 491 N.Y.S.2d 331 (1985), aff'd, 67 N.Y.2d 794, 501 N.Y.S.2d 324, 492 N.E.2d 397 (1986) (upholding constitutionality of supplemental benefits statute allowing certain investment earnings of retirees' defined benefit plan to be allocated as supplemental benefits because the statute did not impair or diminish the level of benefits provided under the pension statutes); Halstead v. City of Flint, 127 Mich. App. 148, 338 N.W.2d 903, 906 (1983) (upholding a supplemental benefits statute funded by the pension plan's surplus and only for the benefit of certain retirees, holding that because there is no evidence that [the ordinance] diminishes or impairs the full payment of plaintiffs' accrued financial benefits, the ordinance does not violate the constitutional proscription against impairment of contracts.). MOA also relies on State ex rel. Dadisman v. Caperton, 186 W. Va. 627, 413 S.E.2d 684 (1991). The West Virginia Retirement System consisted of two retirement plans, one fully funded and the other underfunded, within a single system. Id., 413 S.E.2d at 686, 690. The monies of both plans had been accounted for on a system-wide basis and collectively invested. Id. at 690. A subsequently enacted statute allowed the two plans to be actuarially valued as one system to determine the amount of employer contributions required; this allowed contributions to be suspended because the system as a whole was actuarially sound although funds from the overfunded plan were diverted to cover losses in the underfunded plan. Id. Members of the overfunded plan alleged that the surplus in their plan belonged to them, and could not be diverted to cover liabilities in the other plan. Id. The court rejected this argument, finding that so long as the system remained actuarially sound there was no violation. Id. Whether or not these cases are distinguishable, as the class argues, [14] we need not consider whether the class members had a right to receive increased benefits or share in the accumulated surplus, because we have held that AO 94-95 impairs the vested right of members of Plans I and II to have actuarial soundness of Plans I and II evaluated independently of any other plan. We are more persuaded by Valdes v. Cory, 139 Cal. App.3d 773, 189 Cal. Rptr. 212 (1983), cited by the class in support of its argument that members of Plans I and II had a vested interest. During a budget crisis the California legislature passed emergency legislation that allowed the state to suspend contributions to the public employees retirement system. Id., 189 Cal. Rptr. at 216-17. Although the state's action had not reduced employee benefits under the system, the court determined that the state could not suspend or reduce its statutorily defined contributions absent actuarial input to ensure that the system would remain actuarially sound. Id. at 223. The court stated that although an employee may not suffer out of pocket expenses, the interest of the employee at issue here is in the security and integrity of the funds available to pay future benefits. Id. at 222.