Court Opinion

ID: 2734241
Source: CourtListenerOpinion
Date Created: 2014-09-18 19:00:35.133352+00
Date Added: 2024-06-11T13:26:46.307409
License: Public Domain

Case: 13-13885    Date Filed: 09/16/2014       Page: 1 of 25

                                                                             [PUBLISH]

                IN THE UNITED STATES COURT OF APPEALS

                         FOR THE ELEVENTH CIRCUIT
                           ________________________

                                 No. 13-13885
                           ________________________

                       D.C. Docket No. 4:11-cv-03336-VEH

JOE TAYLOR,
JEFF MAYBEN,
LECIL HARRELSON,
JEFF MORRIS,
JOHN ALAN CALVERT,
DAVID PUTMAN,
DERRECK SHERRILL,
on behalf of themselves and all others similarly situated,

                                                   Plaintiffs - Appellants,

                                       versus

CITY OF GADSDEN,
an Alabama Municipal corporation,
SHERMAN GUYTON,
in his official capacity as Mayor of the City of Gadsden,

                                                   Defendants - Appellees.
               Case: 13-13885       Date Filed: 09/16/2014       Page: 2 of 25

                              ________________________

                      Appeal from the United States District Court
                         for the Northern District of Alabama
                             ________________________

                                   (September 16, 2014)

Before TJOFLAT, Circuit Judge, MOORE, ∗ Chief District Judge, and
SCHLESINGER, ∗ District Judge.

TJOFLAT, Circuit Judge:

       This case presents a problem common to most cities in the United States.

Their pension funds have been operating at a substantial loss, and the cities’ long-

term liabilities are becoming unfunded at an exponentially increasing rate. That is,

the contributions employees and cities are making to pension funds—as a

percentage of the employees’ salaries—are being used to pay the pensions earned

by retirees instead of being set aside and invested for employees’ retirements.

       The trend is all too familiar to Gadsden, Alabama. In 2011, its pension

program—administered by the State of Alabama but comprised of local funds—

had an unfunded liability of $50.9 million. In fact, Gadsden anticipated having to

pay 24.54% of its employees’ total compensation out of public funds during the

       ∗
          Honorable K. Michael Moore, Chief United States District Judge for the Southern
District of Florida, sitting by designation.
       ∗
         Honorable Harvey E. Schlesinger, United States District Judge for the Middle District
of Florida, sitting by designation.

                                               2
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following year to prevent default. This projected expense contributed to a $1.5

million shortage in Gadsden’s proposed budget.

       With its back against the wall—and in an effort to resuscitate its flailing

pension program—Gadsden raised its employees’ pension contributions by 2.5%

of their total compensation. It did so pursuant to an Act passed by the Alabama

legislature mandating such an increase for state employees and permitting, but not

requiring, localities to do the same. In response, a class of Gadsden firefighters 1—

whose contribution rate was raised from 6% to 8.5%—brought this lawsuit. They

alleged that the City’s actions impaired the terms of their employment contracts, in

violation of both the United States Constitution 2 and the Alabama Constitution.3

After extensive record development, and on cross-motions for summary judgment,

the District Court dismissed the complaint for failing to demonstrate that any

contractual right had been impaired. We affirm.

       1
          The initial complaint was a putative class action filed by seven named firefighters—Joe
Taylor, Jeff Mayben, Lecil Harrelson, Jeff Morris, John Calvert, David Putman, and Derreck
Sherrill. During the litigation, the class was officially certified to include all other firefighters
who saw their pension contributions rise. See infra part II.
       2
           U.S. Const. art. I, § 10, cl. 1.
       3
           Ala. Const. art. I § 22.

                                                   3
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                                              I.

       Since 1939, Gadsden has provided its firefighters with a pension program as

part of their compensation. Firefighters initially belonged to a local program, the

Policemen’s and Firemen’s Retirement Fund of the City of Gadsden (the “PFRF”).

In 2002, concerns about the PFRF’s solvency led Gadsden to negotiate a new

arrangement with these employees: the City, it was agreed, would terminate the

local fund and move all of its assets, liabilities, and members into the Employee

Retirement System of Alabama (the “ERS”)—a state-administered retirement fund.

All Gadsden employees, except for firefighters and police officers, had been

members of the ERS since 1970.

       Because the current plan’s unfunded liability stems from the PFRF, we first

describe the PFRF and the consequences of its merger with the ERS in 2002. We

then turn to the events surrounding Gadsden’s decision to increase plaintiffs’

pension contribution rate.

                                             A.

           Alabama Legislative Act 106 of 1939 established the PFRF in Gadsden.4

Part of the PFRF’s funding came from employee contributions. At the time of the

       4
        The Act applied to all Alabama cities with a population between 24,000 and 40,000.
1939 Ala. Acts 131; 1931 Ala. Acts 174. Gadsden qualified as such a city.

                                              4
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PFRF’s creation, police officers and firefighters were required to contribute 2% of

each paycheck to the fund.5 Over the years, this contribution rate increased three

times: to 4% in 1959, 6 to 10% in 1975, 7 and to 11% in 1983. 8 In exchange for

these contributions, an employee who completed thirty years of consecutive

service was entitled to “receive benefits equal to 50% of the final salary received

by that person at the time of his or her retirement.” 1980 Ala. Acts 674, 682 §

12(2).9

       But serious concerns eventually arose about the fund’s financial health.

Doc. 50-9, at 11–12. The PFRF Board of Trustees 10 received several actuarial

reports concluding that the PFRF did not have enough resources to meet its long-

term obligations, and retiree benefits were being paid out as fast as current

contributions were being paid in. Doc. 50-5, at 8–9. In short, the fund was “going

       5
           1939 Ala. Acts 131, 133 § 5.
       6
           1959 Ala. Acts 765, 767–68 § 5(c).
       7
           1975 Ala. Acts 1787, 1790–91 § 5(h).
       8
       1980 Ala. Acts 674, 678 § 5(j) (requiring members of the police and fire departments to
pay 10% from 1980 to 1982 but increasing the rate to 11% beginning January 1, 1983).
       9
         This provision only applied to members who had become employees on or after October
1, 1975. Id. at 682 § 12(2). Employees who had begun work at an earlier date were eligible to
receive benefits after only twenty years of service. Id. at 681 § 12(2).
       10
          In its final form, the PFRF was governed by a board of trustees comprised of
Gadsden’s Commissioner of Public Safety and three representatives each from both the police
and fire departments. Id. at 675 § 3.

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broke,” and there was a serious chance that Gadsden’s police officers and

firefighters “were going to wake up one day and not have a pension plan.” Id. As

a result, Gadsden’s mayor began considering the possibility of moving PFRF’s

members into the ERS.

       Established in 1945, the ERS is a statewide pension program designed “to

provide retirement and other benefits to state employees, state police, and on an

elective basis to qualified persons of cities, towns, and quasi-public organizations.”

The Retirement Systems of Alabama, http://www.rsa-

al.gov/index.php/members/ers (last visited Aug. 26, 2014). Participation in the

ERS is mandatory for all Alabama state employees, as well as for the employees of

any Alabama locality that has elected to participate in the program. 11 Ala. Code §§

36-27-4(a)(1), 36-27-6. Gadsden joined the ERS in 1970, and all of its

       11
          State employees who were hired before the ERS’s enactment could choose to opt out
of joining the program. 1945 Ala. Acts 734, 736 § 3(2). Similarly, the employees of an
Alabama locality at the time it elected to join the ERS had the option of whether to enroll as ERS
participants. Id. at 749 § 12(2). Alabama Code § 36-27-6(a) authorizes
       [t]he governing board of any county, city, town or public or quasi-public
       organization of the state or of any political subdivision thereof . . . by resolution
       legally adopted . . . [to] elect to have its officers and employees from whatever
       sources and in whatever manner paid become eligible to participate in the
       retirement system.

                                                  6
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employees—other than its firefighters and its police officers—have since

participated in the fund.12 Doc. 10-8, at 1.

       Under the terms of the ERS—as provided by statute—an employee with ten

years of “creditable service” 13 shall be eligible to retire with benefits upon reaching

age 60. Ala. Code § 36-27-16(a)(1)(a).14 An employee with twenty-five years of

creditable service is eligible to retire with benefits regardless of age. 15 Id. § 36-27-

16(a)(1)(c). After retirement, these employees will receive compensation from the

       12
           Although ERS participation is generally mandatory for all employees of a locality that
has elected to participate, the statute carves out an exception for local employees who were
already members of a public pension plan at the time of the locality’s decision to participate in
the ERS. Ala. Code § 36-27-6(d). For these members to join, a series of steps must be taken.
First, “a majority of the members of [the local retirement system]” must “elect to become
members of [the ERS], by a petition duly signed by such members.” Id. Second, the governing
board of the city or town that employs these members must pass a resolution electing to have
them participate in the ERS. Id. (referencing the procedure outlined in Ala. Code § 36-27-6(a)).
Finally, the ERS Board of Control has the option of whether to accept a local pension program
into the ERS. Id. (same).
       13
           “Creditable service” is calculated by adding an employee’s length of “prior service”
and “membership service.” Ala. Code § 36-27-1(10). “Membership service” includes “[s]ervice
as an employee rendered while a member of the retirement system and on account of which
contributions are made.” Id. § 36-27-1(9). “Prior service” encompasses an assortment of work
completed prior to “the date of establishment of the retirement system.” Id. § 36-27-1(8); see
also id. § 36-27-11 (enumerating various categories of prior service).
       14
           Since the filing of this case, the Alabama legislature has amended the benefits
provision of the ERS to provide different standards for “Tier II” employees who began work
after January 1, 2013. None of these provisions apply to any of the plaintiffs in this case, so we
refrain from discussing them further.
       15
          Firefighters and local police officers who participate in the ERS earn one additional
year of creditable service every five years, on account of their hazardous work conditions. Ala.
Code § 36-27-59(b)(1). These additional retirement credits, however, are only available “upon
attainment of the requisite years of creditable service” and cannot be used to meet the minimum
requirements for retirement eligibility. Id.; see Doc. 50-28, at 17.

                                                 7
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ERS in an amount calculated according to their final pay and their total length of

service. 16

         Like the PFRF, the ERS requires mandatory employee contributions to the

pension fund. The employee contribution rate has changed over time. All

employees initially contributed 3.5% of their total pay. 17 That rate has increased

twice: to 4% in 1965, 18 and to 5% in 1975.19 The contribution rate for firefighters

and local police officers was raised separately to 6% in 2001.20 State police

officers have had their employee contribution rates raised three times: to 7% in

1957, 21 to 8% in 1965,22 and to 10% in 1971.23

       In addition to employee contributions, the funding for ERS comes from

employer contributions and from investment income. Doc. 47-5 at 33. Although

       16
         Upon retirement, ERS participants will receive payments that annually total at least
“[t]wo and one-eightieth percent of the member’s average final compensation multiplied by the
number of years of his or her creditable service.” Ala. Code § 36-27-16(a)(2)(c)(1). This final
compensation is set as “the average annual compensation . . . during the three years, in [the
employee’s] last 10 years of creditable service for which the average is highest.” Id. § 36-27-
1(15).
       17
            1945 Ala. Acts 734, 744 § 8(1)(b).
       18
            1965 Ala. Acts 468, 476 § 2.
       19
            1975 Ala. Acts 2680, 2687 § 4.
       20
          2000 Ala. Acts 1335, 1336 § 2(b). Specifically, this increase applied to firefighters,
correctional officers, and police officers (excluding state police).
       21
            1957 Ala. Acts 59, 65 § 3.
       22
            1965 Ala. Acts 468, 476 § 2.
       23
            1971 Ala. Acts 2490, 2502–03 § 4.

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all funds are co-mingled and invested by the ERS leadership, each locality

participating in the ERS has a separate account maintained on its own behalf. Doc.

47-1, at 98. Local employers are responsible for making their own contributions at

a rate set by the ERS leadership. Ala. Code § 36-27-6(f). The employer

contribution rate varies from year to year according to the assets and liabilities of a

given locality’s individual account. Id.

       In 2002, amid concerns about the long-term viability of the PFRF,

Gadsden’s mayor looked to the City’s ERS account for a lifeline. That account, in

the mayor’s words, was “solid as a rock.” Doc. 50-5, at 10. And in fact,

Gadsden’s ERS account was so financially sound that, in 2001, it was completely

funded; its employer contribution rate, moreover, was set at just 1.51%. Doc. 47-5,

at 202–03. Impressed by the stability of the ERS account, Gadsden’s mayor

requested that both the police and fire departments appoint a committee to discuss

the possibility of moving the PFRF into the ERS. Doc. 47-8, at 10–12.

       It should come as little surprise, then, that a majority of PFRF members

ultimately agreed that joining the ERS was a prudent choice. 24 This consensus was

       24
          In exchange for the City’s agreeing to take on the PFRF’s unfunded liabilities, merger
with Gadsden’s ERS account was contingent upon the creation of a “Supplemental Fund.” Doc.
10-4 at 1–2. Former PFRF members financed the fund; the City withheld an additional 5% of
their compensation—over and above the 6% contribution rate already required by the ERS—for
                                               9
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the result of prolonged discussion between the PFRF members and the City. See

Taylor v. City of Gadsden, 958 F. Supp. 2d 1287, 1304–06 (N.D. Ala. 2013).

Plaintiffs also had access to the official ERS employee handbook, which explicitly

stated that the “member contribution rate is determined by statute and subject to

change by the Alabama Legislature.” Doc. 50-27, at 9.

       On October 8, 2002, Gadsden issued a resolution that dissolved the PFRF,

moving its members, its assets, and its liabilities into Gadsden’s ERS account.

Doc. 10-8, at 1–2 . Saddled with the PFRF’s expansive unfunded liabilities, the

ERS account quickly went from 100% funded in 2001 to only 58.2% funded by

2007. Doc. 47-5, at 202–03. Over this same period of time, Gadsden’s employer

contribution rate increased from 1.51% to 24.54%. Id. And there it lingered for

years as the City worked, bit by bit, to pay down the debts acquired from the

PFRF. Despite these efforts, the extent of the ERS’s unfunded liabilities totaled

$50.9 million in 2011. Id. at 202.

a period of three years. The money earned from these withholdings went toward paying off the
PFRF’s remaining unfunded liabilities. Id.

                                              10
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                                             B.

      The rate increase at issue in this case traces its roots to an Act of the

Alabama legislature (“Act 676”)25 and a subsequent resolution by the City of

Gadsden made pursuant to that Act. The economic downturn took its toll on the

ERS, which, like all pension programs, is funded in part by investment income. So

when state officials reported “the worst performance of the stock market in a

rolling 10 years in 175 years,” the Alabama legislature had to find a way to rescue

the fund from potential default. See Doc. 47-5, at 34. Its solution was Act 676.

The Act sought to shore up the ERS by increasing the contribution rates paid by all

Alabama state employees. For example, Alabama law enforcement officers,

firefighters, and correctional officers saw their rates increase from 6% to 8.25% in

2011 and then from 8.25% to 8.5% in 2012. Ala. Code § 36-27-59(b)(2).

      But by its terms, the Act only concerned the contribution rates of state

employees. It gave localities participating in the ERS the option of applying these

state-level increases to their own employees (the “local option”). See id. (“Any

employer participating under Section 36-27-6, by adoption of a resolution, may

elect for the increases in employee contributions provided by this act adding this

language to be withheld from the earning compensation of employees to the

      25
           2011 Ala. Acts 1805, 1821 (codified at Ala. Code § 36-27-59(b)(2)).

                                               11
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employer.”). In August 2011, Gadsden accepted this invitation and passed a

resolution “elect[ing] to come under the provision of [Act 676]” and “increase

employee contribution rates as specified by [the Act].” Doc. 10-10. By exercising

the local option, Gadsden reduced its own employer contribution rate by 2% and

closed its $1.5 million budget gap by approximately $500,000. Doc. 47-5, at 203;

Doc. 47-1, at 94.26

                                                II.

       In response to Gadsden’s adoption of the local option, seven Gadsden

firefighters brought this lawsuit against both the City of Gadsden and its mayor,

alleging that the increase in their contribution rate violated the contractual

protections of both Article I, § 10 of the United States Constitution and Article I, §

22 of the Alabama Constitution. 27 Plaintiffs sought a declaratory judgment as well

as “[p]reliminary and permanent injunctive relief restraining [Gadsden] from

       26
          True, “[i]t is undisputed that, when the City passed the pension increase resolution in
August 2011, it was not in a fiscal emergency.” Taylor v. City of Gadsden, 958 F. Supp. 2d
1287, 1314 (N.D. Ala. 2013). But in an effort to “keep the City sound” during difficult
economic times, the City considered the local option the best of many bad choices—including
layoffs and reductions in city services. Doc. 47-2, at 42–43. And the City’s financial data
demonstrate that, even after almost a decade since assuming the PFRF’s unfunded liabilities, the
City’s ERS account was still suffering from large, unfunded liabilities and a correspondingly
high employer contribution rate. See Doc. 47-5, at 202–03.
       27
        We note that plaintiffs’ complaint is limited to its two constitutional claims. Doc. 1, at
12–13. Plaintiffs have not brought a state law breach-of-contract action against the City.
Compare City of Gadsden v. Harbin, ___ So. 3d ___, 2013 WL 6516387 (Ala. 2013).

                                                12
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increasing the contribution rate of firefighter participants in the ERS over 6%.” 28

Doc. 1, at 14. At plaintiffs’ request, the District Court expanded the class of

plaintiffs to include “all hazardous duty firefighters employed by the Gadsden Fire

Department since October 1, 2011 that are participants in the ERS.” Doc. 32, at 5.

       Plaintiffs argued that Gadsden’s resolution adopting the local option was

overbroad in that it applied to firefighters who have over ten years of creditable

service and are thus “vested” in the rights of the pension program. 29 Doc. 49, at

67. After discovery, and on cross-motions for summary judgment, the District

Court rejected plaintiffs’ constitutional claims and dismissed the case with

prejudice. Taylor v. City of Gadsden, 958 F. Supp. 2d 1287 (N.D. Ala. 2013).

Plaintiffs then lodged this appeal. Doc. 64.

                                                III.

       On appeal, plaintiffs argue that Gadsden firefighters with over ten years of

creditable service have a “vested” right to a contribution rate of 6% and that

       28
            In a later amendment to their complaint, plaintiffs added a request that defendants pay
“each plaintiff and class member backpay, compensatory damages, interest and other remedial
relief for the unlawful and excessive withholding of pension contributions.” Doc. 28, at 2.
       29
          In the District Court, plaintiffs argued that “[t]he terms upon which the former PFRF
system were merged into ERS were carefully negotiated between the employees and the City
over a two year period from 2000 to 2002.” Doc. 49, at 59. Specifically, plaintiffs argued that
Gadsden and its firefighters had “contractually agreed on the extent to which the current
employees would fund the liabilities to past retirees.” Id. Plaintiffs appear to have abandoned
this argument on appeal, however, and now point only to the language of the ERS itself as
reflecting the terms of their employment contract with the City.

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Gadsden’s decision to raise that contribution rate violated their constitutional

rights. This argument relies on the assumption that Gadsden made an implied

promise—included in its employment contract with each individual firefighter—

not to raise the contribution rate once a firefighter becomes eligible for pension

benefits under the terms of the ERS. By breaching this implied promise, plaintiffs

allege, Gadsden violated the contractual protections of both the United States

Constitution and the Alabama Constitution. The argument proves too much.

       The Contract Clause of the United States Constitution provides that “[n]o

State shall . . . pass any . . . Law impairing the Obligation of Contracts.”30 A

similarly worded provision in the Alabama Constitution states that “no ex post

facto law, nor any law, impairing the obligations of contracts . . . shall be passed by

the legislature.” 31 Our review of Alabama Supreme Court precedent has convinced

us that Alabama’s provision has the same scope and purpose as the Contract

Clause of the United States Constitution. 32 We now turn to that legal framework.

       30
            U.S. Const. art. I, § 10, cl. 1.
       31
            Ala. Const. art. I, § 22.
       32
             We are bound to apply this provision of the Alabama Constitution according to the
interpretation given to it by the Alabama Supreme Court. See United Mine Workers of Am. v.
Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 1139, 16 L. Ed. 2d 218 (1966). The Supreme Court of
Alabama has explicitly stated that the two provisions share a common purpose. See Opinion of
the Justices No. 333, 598 So. 2d 1362, 1365 (Ala. 1992) (“The purpose of the Contract Clause
. . . of the United States Constitution and Article I, Section 22, of the Alabama Constitution of
1901, is ‘to preserve sacred the principle of the inviolability of contracts against that legislative
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                                              A.

       The Contract Clause prohibits a State from passing any “law” that impairs

the obligation of contracts. As such, the Clause is “aimed at the legislative power

of the state,” New Orleans Waterworks Co. v. La. Sugar-Refining Co., 125 U.S.

18, 30, 8 S. Ct. 741, 747, 31 L. Ed. 607 (1888), and is “directed against legislative

action only,” Barrows v. Jackson, 346 U.S. 249, 260, 73 S. Ct. 1031, 1037, 97 L.

Ed. 1586 (1953). Legislation is “[t]he process of making or enacting positive law

in written form, according to some type of formal procedure, by a branch of

government constituted to perform this process.” Black’s Law Dictionary 982 (9th

ed. 2009).

       Plaintiffs do not challenge an act of legislation, however. Lost in the fog of

litigation, this undisputed point bears emphasis: the contribution rate increase

stems from a resolution by the City of Gadsden in 2011, Doc. 10-10, that the City

interference [that] the history of governments has shown to be so imminent, in view of the
frequent engendering of popular prejudice, and the consequent fluctuations of popular opinion.’”
(alteration in original) (footnote omitted) (quoting Edwards v. Williamson, 70 Ala. 145, 151
(1881))). And when a plaintiff has contended that a particular action violates both the Contract
Clause of the U.S. Constitution and § 22 of the Alabama Constitution, the Alabama Supreme
Court has made no distinction between the two in analyzing the constitutionality of the
challenged act. E.g., Smith v. City of Dothan, 279 Ala. 571, 574–76, 188 So. 2d 532, 534–36
(Ala. 1966) (per curiam). Indeed, the Alabama Supreme Court has noted that the two provisions
are “similar in constitutional verbiage” and has used precedent from the U.S. Supreme Court to
determine whether a challenged piece of legislation violated the contractual protections of
Alabama’s own Constitution. City of Birmingham v. Penuel, 242 Ala. 167, 172, 5 So. 2d 723,
726 (Ala. 1942).

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was permitted—but not required—to adopt pursuant to state law, see Ala. Code §

36-27-59(b)(2). The State of Alabama is not a defendant in this case. And the

City of Gadsden’s decision to implement the local option did not involve an

ordinance33 or a similar act bearing the imprimatur of the State’s legislative

authority.

       Municipalities, it should be remembered, are “bodies politic and corporate.”

Ala. Code § 11-40-1; see also Laramie Cnty. Comm’rs v. Albany Cnty. Comm’rs,

92 U.S. 307, 308, 23 L. Ed. 552 (1875) (“Counties, cities, and towns are municipal

corporations . . . . Beyond doubt, they are, in general, made bodies politic and

corporate . . . .”). Creatures of state statute, municipalities are formed “as

convenient agencies for exercising such of the governmental powers of the state as

may be [entrusted] to them.” Hunter v. City of Pittsburgh, 207 U.S. 161, 178, 28

S. Ct. 40, 46, 52 L. Ed. 151 (1907). By adopting the resolution, the City acted as

would any board of directors faced with a decision about how to best manage the

affairs of a corporation. See 1 Eugene McQuillin, The Law of Municipal

Corporations § 2:14 (3d ed. 2010) (noting that “the mayor and council, acting

       33
          An ordinance “means something more than a mere verbal motion or resolution” and is
“local law which is adopted with all the legal formality of a statute.” 5 Eugene McQuillin, The
Law of Municipal Corporations § 15:2 (3d ed. 2010). Unlike an ordinance, a resolution “denotes
something less solemn or formal” and is “usually a mere declaration with respect to future
purpose or proceedings.” Id. (footnotes omitted).

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officially as the municipal corporation, are analogous to trustees representing the

corporation and the public”). That is, the City merely decided on a “particular item

of business coming within [its] official cognizance . . . relating to the

administrative business of the municipality.” Id. § 15:2. As a result, the

contribution rate increase was not “an exercise of legislative power”; instead, the

local option “was established by the [Alabama] legislature” and “its execution

[was] committed to the municipal authorities.” New Orleans Waterworks Co., 125

U.S. at 31–32, 8 S. Ct. at 748–49; cf. Jamaica Ash & Rubbish Removal Co. v.

Ferguson, 85 F. Supp. 2d 174, 183 (E.D.N.Y. 2000) (dismissing a Contract Clause

claim because the challenged state action bore “none of the hallmarks of a

legislative act; it was an application of the law, not the creation of a law”).

      Without passing any “law,” Gadsden was, at bottom, “doing nothing

different from what a private party does.” Horwitz-Matthews, Inc. v. City of

Chicago, 78 F.3d 1248, 1250 (7th Cir. 1996). As a result, the plaintiffs have no

basis upon which to launch a Contract Clause challenge in the first instance.

                                                B.

      Even assuming the City’s resolution can properly anchor a Contract Clause

challenge, plaintiffs cannot prevail. In evaluating their claim, we must first

determine whether the state law at issue “operated as a substantial impairment of a

contractual relationship.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234,
                                           17
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244, 98 S. Ct. 2716, 2722, 57 L. Ed. 2d 727 (1978). That inquiry turns on

“whether there is a contractual relationship, whether a change in law impairs that

contractual relationship, and whether the impairment is substantial.” Gen. Motors

Corp. v. Romein, 503 U.S. 181, 186, 112 S. Ct. 1105, 1119, 117 L. Ed. 2d 328

(1992). Assuming a substantial impairment of a contractual relationship has taken

place, the challenged law will nonetheless pass constitutional muster if it is

“reasonable and necessary to serve an important public purpose.” U.S. Trust Co.

of N.Y. v. New Jersey, 431 U.S. 1, 25, 97 S. Ct. 1505, 1519, 52 L. Ed. 2d 92

(1997).

                                               1.

      For purposes of Contract Clause analysis, the existence of a contract is a

federal question. Romein, 503 U.S. at 187, 112 S. Ct. at 1109–10. That said, we

must “accord respectful consideration and great weight to the views of the State’s

highest court” when making this determination. Id. (quoting Indiana ex rel.

Anderson v. Brand, 303 U.S. 95, 100, 58 S. Ct. 443, 446, 82 L. Ed. 685 (1938)). In

doing so, we must be mindful that, as a constitutional matter, “the word ‘contracts’

. . . is used in its usual or popular sense as signifying an agreement of two or more

minds, upon sufficient consideration, to do or not to do certain acts.” Crane v.

Hahlo, 258 U.S. 142, 146, 42 S. Ct. 214, 215, 66 L. Ed. 514 (1922).

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      Despite ample discovery, no party has produced the written agreement

between the firefighter-employees and the City, nor is there much evidence about

what the terms of such a writing might contain. We look instead to the statutory

provisions that govern the ERS. When engaging in such a review, we must

“proceed cautiously both in identifying a contract within the language of a

regulatory statute and in defining the contours of any contractual obligation.”

Nat’l R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451,

466 105 S. Ct. 1441, 1452, 84 L. Ed. 2d 432 (1985). That is because “the principal

function of the legislature is not to make contracts, but to make laws that establish

the policy of the state”; after all, “[p]olicies, unlike contracts, are inherently subject

to revision and repeal.” Id. at 466, 105 S. Ct. at 1451. Unless the legislature

evinces an “unmistakable” intent to be contractually bound, United States v.

Winstar, 518 U.S. 839, 860, 116 S. Ct. 2432, 2448, 135 L. Ed. 2d 964 (1996)

(plurality opinion), we presume “that statutory enactments do not create

contractual obligations,” McGrath v. R.I. Retirement Bd., 88 F.3d 12, 19 (1st Cir.

1996); see also Winstar, 518 U.S. at 921, 116 S. Ct. at 2477 (Scalia, J., concurring)

(“Governments do not ordinarily agree to curtail their sovereign or legislative

powers, and contracts must be interpreted in a commonsense way against that

background understanding.”).

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      Here, the ERS—a public pension plan—can be fairly characterized as “part

of the compensation package that [the City] dangle[s] to attract and retain qualified

employees.” See McGrath, 88 F.3d at 17. Pensions are thus “regarded as a species

of unilateral contracts.” Id.; see Bd. of Trs. of the Policemen’s & Firemen’s Ret.

Fund v. Cary, 373 So. 2d 841, 842 (Ala. 1979) (per curiam) (“We analogize [a

public pension program] to a unilateral contract . . . .”). That is, “the promise of a

pension constitutes an offer which, upon performance of the required service by

the employee[,] becomes a binding obligation.” McGrath, 88 F.3d at 17 (alteration

in original) (quoting Hoefel v. Atlas Tack Corp., 581 F.2d 1, 4 (1st Cir. 1978)).

      The Alabama Supreme Court has made clear that once employees “have

served and retired, the benefits to which they are entitled may not be reduced

subsequent to their retirement absent an express reservation of a right to amend at

any time.” Cary, 373 So. 2d at 842. In the State of Alabama, then, contractual

rights to retirement benefits accrue when employees have fulfilled their end of the

bargain. For firefighters, this means performing ten years of creditable service and

upon their reaching the age of retirement, or, alternatively, performing twenty-five

years of creditable service, regardless of their age. See Ala. Code § 36-27-

16(a)(1). Until that time, however, employees’ interests in the retirement plan are

“subject to legislative modification.” Cary, 373 So. 2d at 843.

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      Plaintiffs argue that Gadsden firefighters who have complied with the

statutory requirements possess a “vested” right to a 6% employee contribution rate.

This argument relies on the assumption that there exists an implied promise not to

raise the employee contribution rate once a firefighter becomes eligible for

retirement benefits. We can find neither hide nor hair of such a promise.

      To begin, nothing in the text of Alabama Code § 36-27 suggests that the

employee contribution rate is immune from change, even after an employee’s

retirement benefits have vested. Employee contribution rates, moreover, were

amended several times before plaintiffs joined the ERS. And it is well established

that “the pervasiveness of . . . prior regulation in [an] area suggests that[,] absent

some affirmative indication to the contrary,” the most recent modification will not

necessarily be the last. Nat’l R.R. Passenger Corp., 470 U.S. at 469, 105 S. Ct. at

1453. Indeed, by our count, the contribution rate for various classes of ERS

participants has been amended at least six times over the course of several decades.

See supra part I.A. When deciding whether to join the ERS, the former PFRF

members were on notice of these prior increases, including an increase only one

year before, which applied specifically to firefighters. Plaintiffs also had access to

the 2002 ERS employee handbook when choosing whether to accept Gadsden’s

offer to change the terms of their pension. This handbook explicitly stated that the

“member contribution rate is determined by statute and subject to change by the
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Alabama Legislature.” Doc. 50-27, at 9. Taken together, this evidence indicates

that whatever contractual terms preside over the employment relationship between

the City and its firefighters, a promise to refrain from raising contribution rates is

not one of them.

      Plaintiffs challenge this conclusion by pointing to Alabama Supreme Court

precedent holding that pension benefits, once vested, cannot be reduced by

subsequent legislation. Br. of Appellant at 29–32. Their reliance on this line of

precedent is misplaced. Nothing in the reasoning of these cases suggests that every

pension provision is rendered immutable once an employee becomes eligible to

retire. To the contrary, the Alabama Supreme Court has selectively extended such

protection only to benefits promised by the employer for which the employee has

satisfied all the conditions precedent. See, e.g., Cary, 373 So. 2d at 842 (“[W]here

the promissee has completely performed all of the obligations and all conditions

precedent . . . the promisor has an unqualified duty to pay those obligations.”);

Snow v. Abernathy, 331 So. 2d 626, 631 (Ala. 1976) (“Snow’s contractually

vested right was to receive all benefits ‘contracted’ for . . . . By electing, expressly

or by assent, to participate in such plan employees acquire vested rights of contract

to the benefits provided therein upon acceptance of the plan.”); Smith v. City of

Dothan, 279 Ala. 571, 576, 188 So. 2d 532, 536 (Ala. 1966) (per curiam) (“[U]pon

reaching eligibility for retirement . . . [the employee] acquired a vested right to the
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benefits provided by [the pension program] free of the amendatory effect of

[subsequent legislation].”).

      Here, the City did not alter plaintiffs’ pension benefits; instead, it altered

their pension obligations. This distinction—between pension benefits and pension

obligations—is warranted by the well-worn difference between earned and

anticipated compensation under the Contract Clause. Earned compensation is

contractually protected: for example, if a public employee renders services “under

a law specifying his compensation,” he acquires a contractual right to be paid the

amount promised. Mississippi ex. rel. Robertson v. Miller, 276 U.S. 174, 179, 48

S. Ct. 266, 268, 72 L. Ed. 517 (1928). Anticipated compensation, by contrast, does

not receive the same protection; before a public employee renders services, the

amount of promised compensation can be freely amended. See Dodge v. Bd. of

Educ., 302 U.S. 74, 78–79, 58 S. Ct. 98, 100, 82 L. Ed. 57 (1937) (“[A]n act

merely fixing salaries of officers creates no contract in their favor, and the

compensation named may be altered at the will of the Legislature.” (footnote

omitted)). Nothing in the challenged legislation divests plaintiffs of their earned

pension benefits. Instead, the increased contribution rate simply reduces plaintiffs’

anticipated compensation by deducting an additional 2.5% from their future take-

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home pay. 34 See City of Birmingham v. Penuel, 242 Ala. 167, 174, 5 So. 2d 723,

728 (Ala. 1942) (“[T]he legislature may, without impairing the obligation of

contract, reduce the compensation of an official . . . .”); cf. San Diego Police v. San

Diego Ret. Sys., 568 F.3d 725, 738 (9th Cir. 2009) (“[I]ndirect effects on pension

entitlements do not convert an otherwise unvested benefit into one that is

constitutionally protected.”).

       In sum, plaintiffs have no contractual right to a static, inviolable 6%

contribution rate. The City was free to amend the employee contribution rate

without constitutional consequence.

                                                     2.

       Even assuming the existence of a contractual provision not to raise the

employee contribution rate, plaintiffs still cannot succeed on their Contract Clause

challenge because—at most—the City has breached a contract, not impaired one.

Determining whether legislative action qualifies as a breach of contract or an

impairment of contract “depends on the availability of a remedy in damages.”

E&E Hauling, Inc. v. Forest Preserve Dist. of Du Page Cnty., Ill., 613 F.2d 675,

679 (7th Cir. 1980) (citing Hays v. Port of Seattle, 251 U.S. 233, 237, 40 S. Ct.

       34
           That is not to say that the City could automatically reduce the plaintiffs’ compensation
to zero. A City firefighter cannot be “removed, discharged, or demoted, except for cause, upon
written charges or complaint and after an opportunity to face his or her accusers and be heard in
his or her own defense.” Ala. Code § 45-28A-42.11.

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125, 64 L. Ed. 243 (1920)). In other words, we must distinguish “between a

measure that leaves the promisee with a remedy in damages for breach of contract

and one that extinguishes the remedy.” Horwitz-Matthews, Inc. v. City of

Chicago, 78 F.3d 1248, 1250 (7th Cir. 1996). This formulation means that “where

a city breaches a contract without a state legislative mandate as a defense, nothing

generally prevents or excuses the city from performing its obligations, and thus the

city will be liable for damages.” Crosby v. City of Gastonia, 682 F. Supp. 2d 537,

543–44 (W.D.N.C. 2010).

      Of course, there is no legislative mandate to speak of in this case. The local

option is just that—an option. The State has not passed legislation “that would

prevent a local government from fulfilling its obligations under a contract [such

that] . . . the breaching local government is prevented by state law from

performing.” Id. at 543. Because no state action has denied plaintiffs the

possibility of a damages remedy, “it would be absurd to turn [the] breach of

contract . . . into a violation of the federal Constitution.” Horwitz-Matthews, 78

F.3d at 1250.

                                       IV.

      Plaintiffs have failed to demonstrate that the City of Gadsden impaired their

contractual rights in this case. Accordingly, the judgment of the District Court is

      AFFIRMED.
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