Robert F. Cherry, Jr., et al. v. Mayor and City Council of Baltimore City
No. 36
Court of Appeals of Maryland
August 16, 2021
Opinion by Biran, J.
MUNICIPAL CORPORATIONS – PENSIONS AND RETIREMENT BENEFITS – BREACH OF CONTRACT – Baltimore City maintains a Fire and Police Employees’ Retirement System (the “Plan”) to provide pension benefits to uniformed officers in the City’s police and fire departments. The statute governing the Plan, Article 22 of the Baltimore City Code, provides that a contractual relationship exists between Plan members and the City, and that the benefits provided under the Plan “shall not thereafter be in any way diminished or impaired.” Balt. City Code, art. 22, § 42 (2009). The Court of Appeals held that the City did not breach its statutory contract with Plan members by allegedly “underfunding” retiree reserves.
MUNICIPAL CORPORATIONS – PENSIONS AND RETIREMENT BENEFITS – BREACH OF CONTRACT – VESTED BENEFITS – RESERVED POWER – In June 2010, the City Council enacted Ordinance 10-306, which made several significant changes to the Plan’s terms and benefits. The Court of Appeals held that the City breached its contract with those Plan members who were retired as of June 30, 2010 (the “Retired Sub-class”), or eligible to retire but still working on June 30, 2010 (the “Retirement-Eligible Sub-class”). Ordinance 10-306 retrospectively divested benefits belonging to those Plan members by replacing a market-driven post-retirement cost-of-living adjustment feature (the “Variable Benefit”) with a tiered cost-of-living adjustment (“COLA”). However, the City did not breach its contract with Plan members who were working as of June 30, 2010, and not yet eligible to retire as of that date (the “Active Sub-class”). A governmental employer has the reserved power to make reasonable and necessary prospective changes to its pension plan. The Court of Appeals affirmed the circuit court’s findings that, as to the Active Sub-class, whose benefits had not vested prior to the enactment of Ordinance 10-306, the City made reasonable and necessary prospective changes to the Plan.
MUNICIPAL CORPORATIONS – PENSIONS AND RETIREMENT BENEFITS – BREACH OF CONTRACT – DAMAGES – The Court of Appeals held that the circuit court correctly calculated damages owed to the Retired and Retirement-Eligible Sub-classes. The circuit court did not err in accepting the damages model provided by the City’s expert witness, and rejecting the competing model advanced by the Plan members’ expert witnesses. The City’s expert witness prоvided the circuit court with an accurate assessment of how the members of the Retired and Retirement-Eligible Sub-classes would have fared if, hypothetically, the City had retained the Variable Benefit for them but made the prospective changes to the Plan for other members that the City was permitted to make.
ROBERT F. CHERRY, JR., ET AL. v. MAYOR AND CITY COUNCIL OF BALTIMORE CITY
No. 36
IN THE COURT OF APPEALS OF MARYLAND
September Term, 2020
Opinion by Biran, J.
Circuit Court for Baltimore City
Case No.: 24-C-16-004670
Argued: February 4, 2021
Barbera, C.J.
McDonald
Watts
Hotten
Getty
Booth
Biran,
JJ.
Filed: August 16, 2021
Over the
Baltimore City maintains a Fire and Police Employees’ Retirement System (the
On behalf of themselves and others similarly situated, several City police officers and firefighters filed a class action lawsuit against the Mayor and City Council of Baltimore
in the United States District Court for the District of Maryland. After the federal court directed the plaintiffs to refile their state law claims in state court, the plaintiffs commenced a class action lawsuit in the Circuit Court for Baltimore City, alleging claims for declaratory relief and breach of contract. Eventually, the circuit court (the Honorable Julie R. Rubin) certified a class of plaintiffs (the Appellants/Cross-Appellees here) and three sub-classes: Plan members who retired from service before the enactment of Ordinance 10-306 (the “Retired Sub-class”); currently employed members who had reached eligibility to retire but who had not yet retired (the “Retirement-Eligible Sub-class”); and currently employed members who had not yet reached retirement eligibility (the “Active Sub-class”).
After a bench trial, the circuit court ruled that the City breached its contract with the Retired and Retirement-Eligible Sub-classes, finding that Ordinance 10-306 retrospectively divested the members of those sub-classes of benefits they had earned. The court awarded more than $30 million in damages to members of the Retired and Retirement-Eligible Sub-classes. However, the circuit court found no breach of the City’s contract with the Active Sub-class, ruling that, as to the Active members, Ordinance 10-306 did not affect vested benefits, but rather made permissible prospective changes to the Plan.
Finding no factual or legal errors in the circuit court’s rulings, we affirm its judgment in all respects.
I
Background
A. The City’s Fire and Police Employees’ Retirement System (The Plan)1
Article II, Section 26 of the Baltimore City Charter authorizes the City to “establish and maintain a system of pensions and retirement benefits” for officers and employees of the Baltimore Police and Fire Departments. Balt., Md., Charter art. II, § 26. In 1962, the City established the current version of its pension plan for police officers and firefighters – the Plan – to be managed by а Board of Trustees (the “Board” or the “Trustees”). Balt. City Code, art. 22, §§ 29, 33(a) (2009). The Plan’s terms and benefits are set forth in Article 22 of the Baltimore City Code (“Article 22”).2
Changes to the Plan may only be made by legislation passed by the City Council and signed into law by the Mayor.
shall thereupon be deemed to have entered into a contract with the Mayor and City Council of Baltimore, the terms of which shall be the provisions of this Article 22, as they exist at the effective date of this ordinance, or at the time of becoming a member, whichever is later, and the benefits provided thereunder shall not thereafter be in any way diminished or impaired.
The Plan covers all uniformed officers of the Baltimore Police and Fire Departments, as well as certain other public safety workers. Under the Plan, there are three categories of retirement benefits eligibility: Service Retirement, Non-Line-of-Duty Disability Retirement, and Line-of-Duty Disability Retirement. Participation in the Plan by covered workers is mandatory during their employment. Prior to July 1, 2003, Service Retirement eligibility required members to reach 50 years of age or accrue 20 years of service. For membership beginning on or after July 1, 2003, members were eligible for Service Retirement when they reached 50 years of age with 10 years of service as a contributing member, or accrued 20 years of creditable service with 10 years of service as a contributing member. In the years just prior to the passage of Ordinance 10-306, Active members contributed 6% of their regular annual compensation to the Plan.
Section 36 of Article 22 lists four funds that are used to hold Plan assets and from which basic benefits are paid: (i) the Annuity Savings Fund (“ASF”); (ii) the Annuity Reserve Fund (“ARF”); (iii) the Pension Accumulation Fund (“PAF”); and (iv) the Pension Reserve Fund (“PRF”). Id. § 36(a)(1). The ASF, ARF, and PRF all are housed within the PAF.
The ASF “consists of the assets for each member’s annuity portion of the member’s retirement benefit.” Id. § 36(b)(1). In other words, the ASF contains member contributions for Active members. Id. § 36(b)(2). Under § 36(b)(4), the Board of Trustees transfers a
member’s accumulated contributions3
from the ASF to the ARF upon the member’s retirement. The ARF serves as the fund from which shall be paid all annuities4 and all benefits in lieu of annuities, payable as provided in § 36. In short, the ARF contains retired members’ contributions.Section 36(d) defines the PAF, including how it is funded and maintained:
The Pension Accumulation Fund shall be the fund in which shall be accumulated all reserves for the payment of all pensions and other benefits payable from contributions made by the City of Baltimore and from which shall be paid all pensions and other benefits on account of members with prior service credit and lump sum death benefits for all members payable from the said contributions.
Id. § 36(d)(1).
Under § 36(e), the PRF is “the fund from which the pension is paid to members not entitled to credit for prior service and benefits in lieu thereof.” When a member not entitled to credit for prior service5
Section 36 requires that the City make annual contributions to the Plan. The City’s annual contribution to the Plan consists of two primary components: for the preceding fiscal year, (1) “a certain percentage of the earnable compensation of each member to be known as the ‘normal contribution,’” and (2) “an additional percentage of [the member’s] earnable compensation to be known as the ‘accrued liability contribution.’” Id. § 36(d)(2). Section 36(d)(5) describes the City’s annual contribution requirement with further reference to the two components:
The required contribution by the City of Baltimore is the amount equal to the normal cost, plus the accrued liability contribution or less the amortization of the excess assets, as the case may be. However, the aggregate payment by the City must be sufficient, when combined with the amount in the fund, to provide the pensions and other benefits payable out of the [PAF] during the then-current year.
Id. § 36(d)(5).
Section 37 provides that “[t]he creation and maintenance of reserves in the [PAF], the maintenance of annuity reserves and pension reserves as provided for, and regular interest creditable to the various funds as provided in § 35(b) of this subtitle and the payment of all pensions, annuities, retirement allowances, refunds and other benefits granted under the provisions of this subtitle and all expenses in connection with the administration and operation of this Retirement System are hereby made obligations of the City of Baltimore.”
Section 33(m) requires an actuary, designated by the Board of Trustees, to serve as “the technical adviser of the Board of Trustees on matters regarding the operation of the funds” of the Plan. Responsibilities of the actuary include: conducting an actuarial
investigation at least once every five years to assess and value the Plan’s assets and liabilities and “certify” Plan member and City contribution rates and relevant tables going forward, id. § 33(n)-(o); recommending the Board formally adopt actuarial tables and rates of contribution based on the survey, id. § 33(n); and performing “an annual valuation of the assets and liabilities of the funds of the system” based on the adopted tables. Id. § 33(p).
Each year, the Plan actuary develops an Actuarial Valuation Report (“AVR”), which provides the actuary’s opinion and recommendation to the Board regarding the required annual contribution amount. Id. The AVR is based on, among other things, the interest rate set forth in § 30 of Article 22, and mortality and other statistical tables accepted by the Board. Prior to the enactment of Ordinance 10-306, Article 22 required that the Plan’s actuary use two earnings assumptions in making its recommendations to the Board: an assumed rate of return of 8.25% on assets held for the pre-retirement period, and a rate of 6.8% on assets held for the post-retirement period.6
Following the Board’s approval of the assumptions and methods on which the AVR is based, as well as the Plan actuary’s recommendation and advice regarding the required contributions, the Board certifies the amount of the City’s annual Plan contribution, which is then incorporated into the City’s operating budget. Id. §§ 33(p),The Variable Benefit Feature
In 1983, a variable benеfit feature (the “Variable Benefit”) was added to the Plan as § 36A of Article 22 to provide a post-retirement cost-of-living adjustment (“COLA”) for retirees and beneficiaries with more than two years of retirement. Before the Variable Benefit was instituted, the Plan had no provision for post-retirement benefit increases and members only received raises on an ad hoc basis after lobbying the City Council.
Payment of the Variable Benefit was contingent on the annual investment performance of Plan assets. Any and all earnings of the PRF and ARF between 7.5% and 10%, plus half the earnings in excess of 10%, were transferred from those funds to two different funds, the Paid-Up Benefit Fund and the Contingency Reserve Fund, which were established to hold Variable Benefit assets. The amount of earnings formed the basis to calculate the annual increase to the pension benefit to be paid for the expected life of each eligible member or beneficiary in accordance with the statutory rate.
Variable Benefit payments were not guaranteed by the City. Rather, once the retiree assets reached the defined performance threshold to trigger the Variable Benefit, those benefits would be paid as long as the Paid-Up Benefit and Contingency Reserve Funds permitted. Id. § 36A(e)(ii). Section 36A(e)(ii) further provided that, “§§ 37 and 42 to the contrary notwithstanding, any benefit increase provided under this section is not and does not become an obligation of the City of Baltimore. In the event of any conflict between this section and either or both of § 37 or § 42, this section prevails.” Id.
Investment performance for purposes of calculating the Variable Benefit stood alone for each year. Therefore, performance below the 7.5% threshold was not carried forward and averaged with higher performing future years.
The Impact of the Variable Benefit on the Plan and the City’s Finances
Beginning in February 2002, the Plan’s actuary, Douglas Rowe, concerned about the negative impact of the Variable Benefit on the Plan’s assets, advised the City to consider alternatives to the Variable Benefit. The problem was that the Variable Benefit was drawing funds away from the assets required to pay basic retirement benefits, leading Mr. Rowe to be concerned that “[t]here wouldn’t be enough money to pay benefits over time.”7
In light of these concerns, beginning in 2003 and continuing through 2009, Mr. Rowe recommended reducing the post-retirement earnings assumption rate, which was then 6.8%, to 5%. Lowering that rate would require the City to increase its annual Plan contribution. Despite Mr. Rowe’s repeated recommendations over several years, the Board did not approve a reduction in the post-retirement earnings assumption rate until 2009. The earnings assumption rate on post-retirement assets stayed at 6.8% until the Variable Benefit was removed altogether with the enactment of Ordinance 10-306.
In Fiscal Year (FY) 2009, the City closed a $68.5 million deficit that resulted from the Great Recession in 2008 and 2009 by making significant cuts to other programs. However, as of June 20, 2009, the City still faced a $120 million projected deficit for FY20109
as a result of the Great Recession. As of June 30, 2009, the balance in the PAF showed a deficit of $514,413,177 based on a 6.8% post-retirement earnings assumption rate. At a 5% assumption rate, that deficit would have been $799,133,666, yet an amount greater than all of the earnings attributed to active and retiree Plan member assets nevertheless would have to have been transferred to the Paid-Up Benefit Fund for a FY2010 Variable Benefit increase.The City addressed the FY2010 crisis with additional cuts to core services, but unforeseen reductions in State aid and revenue shortfalls resulted in an additional, mid-year deficit of $60.2 million, which necessitated more cuts, including unpaid furloughs. The record snowfall in 2010 required still more cuts to City services and personnel, as well
as the use of $30 million of emergency reserves. As а result of these conditions, the City faced a $121 million budget deficit for FY2011. This was the City’s third consecutive year of declining revenues and multi-million-dollar budget deficits.
As of June 2010, Plan assets totaled $1,295,823,326. The liabilities owed to retired Plan members as of that date exceeded Plan assets by more than $200 million. The FY2011 recommended budget included a $101 million contribution for the Plan, but did not take into account the additional $64 million contribution that, in light of the stock market’s partial rebound, the City would be required to make if it retained the Variable Benefit and followed the Board’s recommendation to reduce the assumed investment-return rate. In an effort to secure the necessary funds to balance its budget, the City made still more cuts and raised $50 million in new taxes from its already depleted tax base.
In the Spring of 2009, then-City Council President Stephanie Rawlings-Blake had sought advice from the Greater Baltimore Committee (the “GBC”) on how the Plan might be fixed. In response, the GBC formed a Fire and Police Pension Task Force, which produced a report and recommendations regarding modifications to the Plan to rectify what it observed was an “urgent” crisis. The GBC report confirmed that “[t]he City of Baltimore is facing a serious fiscal challenge. Current contributions to fund the [Plan] are inadequate to fully cover the existing and anticipated liabilities required under the pension system.” The report further explained that the combination of “negative investment performance of 21.9%, the recognition of additional accumulated losses … used in previous years to provide benefit improvements to members and retirees, contribution reductions by the City, and costly post-retirement benefit increase provisions
the employer contribution requirements to unsustainable new highs.” The GBC also noted the stark contrast between the Plan’s actuarial valuation, which indicated a funded ratio of 84%, and its market value of 58.2%. The GBC report further averred that a failure to fix the Plan might impair the City’s ability to attract new fire and police employees, as well as new businesses, and might increase the cost of borrowing – a consequence that could result in higher taxes or further budgetary pressures on the City. The report also confirmed the existence of the City’s serious financial problems and the inadequacy of the current contributions to fully cover the existing and anticipated liabilities required under the system, as well as the threat to the City’s ability to provide basic public services and fulfill the commitment it made to retirees. The GBC recommended replacing the Variable Benefit with a COLA not to exceed three percent.
The circuit court’s findings echo the GBC report’s conclusions. The court found that “[t]he Plan was unsustainable in its own right. The design of the Variable Benefit was fundamentally flawed from the start – posing a potential independent annual financial obligation unafflicted by past years’ market performance and the impact such performance might have on the City’s ability to fund the basic benefit in any given year. That design made the Variable Benefit particularly ill-suited to operating the Plan in a volatile market.” The circuit court also found that the Plan’s financial problems, including the unsustainable Variable Benefit, “threatened to dismantle the City’s already weakened capacity to provide basic, core services to City residents” and “its ability to keep pace with its basic benefit Plan obligation.”
Following the GBC report, when it appeared inevitable that legislative changes would be made, police and firefighter union representatives acknowledged that the City could not afford to repair the funding level of the Plan by reducing the post-retirement assumed rate of return to five percent. The unions proposed eliminating the Variable Benefit entirely in favor of a plan that included a fixed 2% COLA and increasing employee contribution requirements from 6% to 9%, spread over an equal number of years. Ultimately, the unions amended their proposal in June 2010 to include extending the 20-year open, level dollar amortization period (then in place) to a 30-year open, level percent-of-pay amortization period; the unions proposed not only to extend the amortization period, but also to change the method in a way that would allow for smaller funding payments at the front end of the period, further exacerbating the City’s unfunded Plan liabilities. The City found the unions’ proposal unappealing because it did not repair the problem but rather delayed it for another day and another administration.
In October 2009, the Board voted to adopt the Plan actuary’s recommendation to reduce the post-retirement earnings assumption rate from 6.8% to 5%. Then Mayor Rawlings-Blake believed that, absent legislative modification of the Plan by the close of FY2010, the “financial health of the City” would be “changed” because of the City’s inability to meet its increased contribution obligation brought about by a drop in the post-retirement assets earnings assumption rate per the Board’s recommendation. Mayor Rawlings-Blake believed that other legislative changes to the Plan were necessary to put the City on the path of pension plan sustainability.
Ordinance 10-306
On June 7, 2010, Council Bill 10-0519 was introduced with proposed changes to the retirement benefits provided under the Plan. At the June 2010 hearing on Bill 10-0519
The unions’ actuary, Thomas Lowman, presented the unions’ counterproposal at the June 2010 hearing.11
Mr. Lowman told the lawmakers: “We aсknowledge the [P]lan is in trouble; we acknowledge that that trend line has to come down.” Mr. Lowman further acknowledged that the City was unable to fund the “true cost” of the Plan if the post-retirement investment assumption were dropped to five percent: “$165 million; that’s the true cost of the benefits if you don’t do anything. We know you can’t afford that.”On June 21, 2010, the City Council voted to adopt Bill 10-0519. Mayor Rawlings-Blake signed the bill into law as Ordinance 10-306 (hereinafter sometimes referred to as the “Ordinance” or “10-306”), effective June 30, 2010. Ordinance 10-306 modified the terms of the Plan in several important respects. First, it replaced the fully market-driven Variable Benefit with a “0-1-2” age-based COLA. Under that tiered COLA, a retiree member (or beneficiary) age 54 or younger on June 30 receives no increase; a 1% increase is paid to those aged 55 to 64 years as of June 30; and a 2% increase is paid to those aged 65 and older as of June 30.12
Second, under the Ordinance, for the first time, the City became a guarantor of all COLAs and past Variable Benefit increases.
Third, it amended Article 22 to include a $16,000 minimum annual benefit for spousal beneficiaries of pre-July 1, 1996 retirees who completed 20 or more years of service. Prior to the enactment of Ordinance 10-306, the Plan included no benefit floor for retiree members or their beneficiaries.
Fourth, it changed the Service Retirement eligibility requirements. Prior to the enactment of the Ordinance, Service Retirement eligibility depended on the date an employee became a Plan member. For those who became Plan members on or before June
30, 2003, Service Retirement was available upon the earlier of reaching age 50 or completing 20 years of service. For those who became Plan members on or after July 1, 2003, Service Retirement was available upon the earlier of reaching age 50 with at least 10 years of covered fire and police (“F&P”) service, or completing
Following the effective date of Ordinance 10-306, Servicе Retirement eligibility was bifurcated into those who are grandfathered into pre-10-306 eligibility criteria and those who are not. Members who met pre-10-306 Service Retirement eligibility as of June 30, 2010, as well as members with 15 or more years of covered F&P service as of June 30, 2010, are grandfathered into pre-10-306 Service Retirement eligibility criteria. All other Active members are subject to 10-306 normal Service Retirement criteria, under which members become eligible for Service Retirement upon the earlier of completion of 25 years of continuous F&P service, or reaching age 55 with a minimum 15 years of continuous F&P service. In addition, Ordinance 10-306 created a new early retirement benefit that enables non-grandfathered members to retire at their pre-10-306 Service Retirement eligibility date, or any date thereafter (but before their post-10-306 Service Retirement eligibility date), subject to a statutory benefit reduction formula.
Fifth, Ordinance 10-306 changed the amounts that members must contribute to the Plan. Prior to 10-306, Plan members were required to contribute 6% of their regular pay toward the Plan. Ordinance 10-306 modified this to a 7% contribution, with a gradual increase to 10% by 2013: a) as of July 1, 2010, 7% of regular pay; b) as of July 1, 2011,
8% of regular pay; c) as of July 1, 2012, 9% of regular pay; and d) as of July 1, 2013, 10% of regular pay.
Sixth, Ordinance 10-306 changed the investment earnings assumption. Prior to 10-306, the Plan operated under a two-tiered “Regular interest” investment earnings assumption for valuation purposes (which figured into the annual City contribution): 8.25% on pre-retirement assets and 6.8% on post-retirement assets. Ordinance 10-306 modified the investment earnings assumption to a straight 8% on all assets.
Seventh, the Ordinance modified the Plan’s deferred retirement option, known as “DROP 2.” The original Deferred Retirement Option Plan (“DROP”) was instituted in 1996 to enable retirement-eligible members to continue in active service without sacrificing the pension benefits they would have received in retirement. This system enabled those eligible for retirement with 20 or more years of service to remain in active duty and collect both their regular salaries plus the sum of what would have been their retirement benefit. Upon retirement, DROP funds were available to members for full withdrawal or as add-ons to monthly benefit payments. DROP was originally adopted on a five-year trial basis under the assumption that it would cost the City a one-time payment of $6 million. Upon review after the initial five years, it was clear that DROP was costing the City several million dollars per year. The City renegotiated with Plan members and instituted DROP 2 in 2009. DROP 2 was available to Plan members with 20 or more years of service as of December 31, 2009, as well as to Plan members hired on or after January 1, 2010 upon completion of 20 years of continuous F&P service.
Under 10-306, DROP 2 eligibility was bifurcated. Members with 15 or more years of covered F&P service as of June 30, 2010, are grandfathered into pre-10-306 DROP 2 eligibility criteria upon completing 20 or more years of service. Members with fewer than 15 years of covered F&P service as of June 30, 2010, are not grandfathered in and attain DROP 2 eligibility upon completion of 25 or more years of covered F&P service.
Finally, Ordinance 10-306 modified the definition of Average Financial Compensation (“AFC”). AFC is used to determine
B. The Federal Lawsuit
Appellants, along with unions that represent them (collectively, the “Federal Plaintiffs”), filed a class action lawsuit against the City and the Board
an
Upon the receipt of proper proofs of the death of a member in service arising out of and in the course of the actual
performance of duty ... there shall be paid: (1) [to his designated beneficiary, and if none, to his estate, his accumulated contributions and a pension of 100% of his current compensation] (2) To his widow to continue during her widowhood …
Id. (quoting Art. 22, § 34(i) (1966) (emphasis
On appeal to this Court, Mrs. Saxton noted that prior versions of what became § 34(i) (its “progenitors,”
This Court affirmed the denial of mandamus, reasoning that there was no ambiguity in the language of the special death benefit provision in the 1966 version of the Code. Id.
at 694.17 We stated that “the
Saxton stands for the proposition that a government employer may make reasonable modifications to its pension plan at any time before an event gives rise to an employee’s right to receive benefits (“the happening of the defined contingencies”). Id. Saxton also teaches that the employee must satisfy all conditions precedent set forth in the Plan (i.e., the defined contingencies) to become entitled to receive the promised benefits. Id. In Saxton, the defined contingency in § 34(i) was “the death of a member in service arising out of and in the course of actual performance of duty.” Id. at 692. Thus, if Lieutenant Saxton had died of his injuries before being involuntarily retired, Mrs. Saxton would have been entitled to the special death benefit.
Section 196 shall be paid,
Id. Ruling in favor of the police officers, the lower court held that the officers, “by virtue of their service to the City of Frederick prior to the repeal of Article XVI, Section 196 of the City Charter, had vested pension rights as set forth therein which still remain in effect and cannot be modified, repealed or defeated by the City’s unilateral acts.” Id. at 627 (internal quotation marks omitted).
The Court of Special Appeals vacated the lower court’s judgment. The court began its analysis by “[t]racing the evolution of theories in the decisional law of public employee statutory pension rights,” id. at 629, from which the court discerned two general approaches in this area: (1) a majority of states treated pension “rights” merely as “gratuities which a gracious and beneficent governmental employer may confer, withhold, modify or repeal as the whim of an omniscient sovereign dictates”; and (2) a minority of states had adopted “a basic concept of contractual rights that vest at time of employment,” but this latter group was “divided upon the extent to which the rights vest in the employee.” Id.
The Quinn Court explained that the lower court had followed “the strict contract theory, holding that when the pension rights vested upon employment or adoption of the plan those rights were immune from prospective legislative impairment.” Id. The intermediate appellate court disagreed with this strict contract approach, opining that the lower court’s “holding goes too far,” but the court nevertheless agreed “that a pension is
more contractual than gratuitous.” Writing in 1977, the court stated: “Having barely concluded the 200th anniversary of our experiment in a democracy that wrenched itself from monarchical rule, it is absurd to speak of a pension as ‘a bounty springing from the appreciation and graciousness of the sovereign’. The medieval or even colonial concepts of a compassionate and generous sovereign rewarding his humble, devoted subjects is completely alien to our modern views of a democratic government’s obligations to its citizens.” Id. at 629-30 (citation omitted).
“Only slightly less bemusing” to the court, however, was “the picture of a citizen whose contractual strength is so formidable” that a governmental employer “can neither terminate nor vary the terms of the employment contract which is the essence of the strict constructionists’ views…. Such rigid interpretation is the inevitable pitfall of seeking pigeonholes with labels as substitutes for logic and common sense.” Id. at 630.
Having found both the “gratuity” approach and the “strict contract” approach wanting, the Court of Special Appeals adopted an intermediate position that turned on whether the employee’s right to a benefit had vested prior to the time of the pension plan modification. Key to the Court’s resolution of the dispute before it was the fact that the prior noncontributory plan provided that the officers would earn pension benefits on a prorated basis as they served the City. To illustrate its point, the court analogized to employee salaries:
It is reasonable to assume, as the court below found factually, that [the police officers] were induced, at least in part, to their employment by the pension benefits held out at the time, just as
they were induced by the salary then offered. The future benefits vested as they were proratedly earned, just as the employee’s rights to their salary vested as it was earned. Momentarily
assuming for argument that the City could terminate either or both of these benefits at its option, by doing so it would have no more right to withdraw retroactively the pro rata pension benefits that had accrued than it could demand repayment of the salary the employees had earned and had been paid. To that extent at least, especially in view of the proportionate prorating provision of Section 196, the pension rights vested absolutely. The provision acts as an express assurance to the employees that pension benefits they have earned by satisfactory service cannot be divested.
Id.
However, the court distinguished between pension rights that have vested and those that have not vested, reasoning that governmental employers may make reasonable changes to their pension plans that do not divest employees of pension benefits they have already earned:
[T]he analogy of earned salary and vested pension does not withstand prospective comparison. The pension plan is not immutable and the government-employer need not keep its provisions precisely intact. As government grows in size and complexity and as more employees draw from the fund, changes must often be made to assure the soundness of the fund and permit its growth commensurate with its prospective needs. The contractual or vested rights of the employee in Maryland are subject to a reserved legislative power to make reasonable modifications in the plan, or indeed to modify benefits if there is a simultaneous offsetting new benefit or liberalized qualifying condition. Each case where a changed plan is substituted must be analyzed on its record to determine whether the change was reasonably intended to preserve the integrity of the pension system by enhancing its actuarial soundness, as a reasonable change promoting a paramount interest of the State without serious detriment to the employee. In short, the employee must have available substantially the program he bargained for and any diminution thereof must be balanced by other benefits or justified by countervailing equities for the public’s welfare.
Id. at 630-31 (citing with approval City of Downey v. Bd. of Admin., Pub. Emps. Ret. Sys., 121 Cal. Rptr. 295, 303 (Ct. App. 1975)).
The court summed up its rule as follows: “If reasonable substitution is offered by an employer and it is declined by the employee, he is barred prospectively from further claims upon the rejected plan and is obviously not eligible to claim under the substitute plan. But the rights which have accrued under the terminated plan may not be retrospectively withdrawn from him.” Id. at 631. The court observed that its line of demarcation between retrospective and prospective pension modifications was in accord with this Court’s opinion in Saxton, based on Saxton’s references to the “ground rules” having changed before Lieutenant Saxton sustained his injuries, and to a municipal corporation’s authority to “make reasonable modifications of a pension plan any time before the happening of the defined contingencies.” See id. at 632-33 (quoting Saxton, 266 Md. at 694).
The intermediate appellate court remanded the case to the lower court to determine whether the new plan “was either necessаry or reasonable when substituted.” Id. at 634.
Since its issuance 44 years ago, Quinn has provided the most detailed explication
to receive a pension through satisfactory service to the government-employer. Quinn, 35 Md. App. at 630.
Second, while an employee’s vested benefits may not be retrospectively eliminated, the employee’s vested right to a pension is not immune to prospective modifications and the government-employer “need not keep its [pension plan] provisions precisely intact.” Id. In other words, a government-employer is permitted to make reasonable prospective modifications to its pension plan, id. at 631, 633, subject to a determination as to whether the change was “either necessary or reasonable when substituted.” Id. at 634. The modification will be upheld as reasonable if it bears “some material relation to the theory of a pension system and its successful operation” and any disadvantages to employees that result from the modification are offset by comparable new advantages, benefits, or liberalized qualifying conditions. See id. at 631. It will be upheld as necessary if it was “intended to preserve the integrity of the pension system by enhancing its actuarial soundness, as a reasonable change promoting a paramount interest of the State without serious detriment to the employee.” Id. In other words, the substituted plan must be “substantially the program” the employee bargained for and, where a diminution in benefits is not balanced with a new advantage, the substitution must be “justified by countervailing equities for the public’s welfare.” Id.
Guided by these principles, in Davis v. City of Annapolis, the Court of Special Appeals concluded that an Annapolis City police officer was entitled to pre-modification plan benefits where the employee’s rights had vested prior to the City’s plan modification. 98 Md. App. 707. Davis involved a mandamus review following the Public Safety
Disability Retirement Board’s decision denying Officer Davis disability retirement benefits for a service-related injury that occurred in 1989 and a re-injury in 1990. Id. The primary issue that the court resolved was whether the pre- or post-modification standard was applicable to determining his benefit eligibility.
Prior to Officer Davis’s injuries and the modification at issue, the standard provided
that an officer was entitled to the occupational disability retirement when that officer was
“INCAPACITATED PERMANENTLY FROM ACTIVE SERVICE.” Id. at 711. In 1991,
the City passed an ordinance to amend the standard. Id. Under the amended standard, an
officer would be eligible if the officer was “WHOLLY AND PERMANENTLY
PREVENTED FROM ENGAGING IN ANY OCCUPATION ... OR ... WHOLLY AND
PERMANENTLY PREVENTED ... FROM PERFORMING ANY JOB IN THE FIRE OR
POLICE DEPARTMENT....” Id. at 711-12. The Public Safety Disability Retirement Board
applied the 1991 standard to Officer Davis’s case and denied disability benefits. After the
Circuit Court for Anne Arundel County denied mandamus relief,
The intermediate appellate court explained that, if it were necessary to determine the validity of the change in standards, that inquiry would turn on “whether the 1991 change diminished the disability benefits under the prior law without conferring other comparable benefits to the class.” Id. at 717-18. However, it was not necessary to conduct that analysis, because the new standard applied “only prospectively as to disability rights that have not theretofore arisen,” id. at 718, and Officer Davis’s “contractual rights to disability benefits vested” under the pre-1991 pension contract because he was injured while the earlier
standard was still in effect. Therefore, the court remanded Officer Davis’s case for reconsideration under the pre-modification standard. Id. at 721.
The cases we have summarized elucidate what up to now have been Maryland’s key principles concerning public pension plan contract law, and which consistently have been applied in federal courts tasked with deciding Contract Clause impairment claims involving Maryland public pension plans. See, e.g., Maryland State Teachers Ass’n, Inc. v. Hughes, 594 F. Supp. 1353 (D. Md. 1984) (applying Quinn); Baker, 487 F. Supp. at 467-70 (examining and applying Saxton and Quinn); Cherry, 2011 WL 11027560, at *6 (citing Quinn and Davis). We now consider the application of these precedents to the contentions of the parties in this case.
2. The City Breached Its Contract with the Retired and Retirement-Eligible Sub-Classes.
The City contends that the circuit court erred in ruling that it breached its contract with the Retired and Retirement-Eligible Sub-classes. According to the City, a correct reading of Saxton and Quinn, as well as federal Contract Clause cases, demonstrate that the City was allowed to make reasonable and necessary retrospective changes to the Plan. Alternatively, the City argues that Ordinance 10-306 only made prospective changes as to the Retired and Retirement-Eligible Sub-classes.
Appellants respond that the circuit court’s analysis regarding the Retired and Retirement-Eligible Sub-classes was correct. They argue that, while Saxton and Quinn allow for the possibility of prospective modifications to pension plans, those decisions make clear that retrospective divestment of earned benefits violates plan members’
contractual rights. According to Appellants, the Contract Clause jurisprudence upon which the City relies does not call into question the validity of the distinction between retrospective and prospective pension modifications. Appellants further contend that the switch from the Variable Benefit to the tiered COLA was retrospective, not prospective, as to the Retired and Retirement-Eligible Sub-classes.
We agree with Appellants that the circuit court correctly determined that the City breached its contract with the Retired and Retirement-Eligible Sub-classes. The City’s argument to the contrary based on Saxton and Quinn misses the mark. The City focuses on the language in Saxton stating that municipal corporations “may make reasonable modifications to pension plans,” but the City does not grapple with the fact that, in the next breath, the Saxton Court qualified that statement by adding that such modifications may be made “at any time before the happening of the defined contingencies.” 266 Md. at 694.
Saxton thus suggests that a modification may not be made with respect to rights that become vested as a result of “the defined contingency” having oсcurred; rather, a modification may only be made prospectively, i.e., in relation to benefits that have not yet vested.
in the plan, or indeed to modify benefits if there is a simultaneous offsetting new benefit or liberalized qualifying condition.” Quinn, 35 Md. App. at 630-31 (emphasis added).
But this language must be read in the context of the opinion as a whole. As discussed above, Quinn made Saxton’s implicit retrospective/prospective distinction explicit. See Quinn, 35 Md. App. at 631 (“If reasonable substitution is offered by an employer and it is declined by the employee, he is barred prospectively from further claims upon the rejected plan…. But the rights which have accrued under the terminated plan may not be retrospectively withdrawn from him.”). Moreover, the reference to “vested rights” italicized above comes in a paragraph that explicitly addresses prospective modifications and concludes by stating that, after a modification, “the employee must have available substantially the program he bargained for and any diminution thereof must be balanced by other benefits or justified by countervailing equities for the public’s welfare.” Id. at 630-31. Further, the Quinn Court cited as support for this holding a California case, City of Downey v. Bd. of Admin., Pub. Emps. Ret. Sys., 121 Cal. Rptr. 295 (Cal. Ct. App. 1975). The Downey Court explained that, upon becoming a plan member, an employee has a contractual or vested right to a pension, “but that right is not rigidly fixed by the specific terms of the legislation in effect during any particular period in which he serves. The statutory language is subject to the implied qualification that the governing body may make modifications and changes in the system. The employee does not have a right to any fixed or definite benefits, but only to a substantial or reasonable pension. There is no inconsistency therefore in holding that he has a vested right to a pension but the amount, terms and conditions of the benefits may be altered.” Id. at 303.
Viewed in the context we have described, Quinn’s reference to “contractual or vested rights of the employee in Maryland [being] subject to a reserved legislative power to make reasonable modifications in the plan” does not refer to vested rights to specific benefits. Rather, it is properly understood to refer to the right, at the time employment begins, to have upon retirement either the pension plan that was in place when employment began or a “reasonable substitution” for that plan. Quinn, 35 Md. App. at 631.
In a final effort to find support for its position in Quinn, the City asserts that the Quinn Court ordered a remand for the lower court to consider whether the retroactive divesting of the police officers’ prorated pension benefits through the substitution of plans was either reasonable or necessary. The City’s interpretation of the remand in Quinn is incorrect. The circuit court in this case cogently explained why a remand was necessary in Quinn, notwithstanding the Quinn Court’s holding that a retroactive divestment of pension rights is contrary to Maryland law:
[T]he five Quinn plaintiffs were employed by the City of Frederick “at various times dating from September 12, 1942 until the present [April 13, 1977] or the recent past.” Quinn, 35 Md. App. at 628. The original pension plan was effective “[a]fter 1951” and was
“repealed on May 18, 1961 by resolution of the Board of Alderman of the City of Frederick. Thereafter, the officers on the police force were offered” a substitute plan. Id. These facts establish that the original plan at issue in Quinn was substituted smack in the middle of the span of years during which the five individual plaintiffs were employed by the City of Frederick, as they were employed “at various times” from 1942 until 1977 (or “the recent past”). Thus, for those Quinn plaintiffs who continued in active service following the adoption of the 1961 substitute plan, the substituted plan represented prospective change (as well as some measure of retrospective change given the pro rata system). With respect to the claims of these plaintiffs, therefore, the trial court was directed to make factual findings as to the necessity or
reasonableness of the substituted plan as a prospective change from its inception.
We agree with the circuit court concerning the meaning of the remand in Quinn.
The City’s argument concerning Contract Clause jurisprudence fares no better. The
Contract Clause provides: “No State shall … pass any … [l]aw impairing the [o]bligation
of [c]ontracts[.]”
The City contends that the federal caselaw applying a “reasonable and necessary” test to determine the constitutionality of a state law that retroactively affects contractual rights militates in favor of our interpreting Maryland common law similarly. Under this theory, the circuit court was wrong to consider whether Ordinance 10-306 was reasonable and necessary only with respect to the prospective changes affecting the Active Sub-class, but rather also should have undertaken that same analysis as to the Ordinance’s retroactive effects on the Retired and Retirement-Eligible Sub-classes.
Although the City does not explicitly ask us to abrogate Quinn and import federal Contract Clause analysis in place of Quinn’s retrospective/prospective distinction, that is the import of the City’s argument. We decline the City’s implicit invitation. As the Fourth Circuit explained in the federal appellate incarnation of this case,
[a] state or municipality does not “impair the obligation of contracts” merely by breaching one of its contracts or by otherwise modifying a contractual obligation. As we stated in Crosby v. City of Gastonia, “[i]t would be absurd to turn every breach of contract by a state or municipality into a violation of the federal Constitution.” 635 F.3d 634, 642 n.7 (4th Cir. 2011) (quoting Horwitz–Matthews, Inc. v. City of Chicago, 78 F.3d 1248, 1250 (7th Cir. 1996)). Thus, our task is not to decide whether a breach of contract has occurred, but to determine whether the City has erected a legal barrier “that [has] prevented the [plaintiffs]
from obtaining damages, or some equivalent remedy, for [any] breach.” Horwitz–Matthews, 78 F.3d at 1251.
Cherry, 762 F.3d at 371. In short, a breach of contract claim is not equivalent to a Contract Clause claim. While all constitutional impairments of contracts are breaches of contract under Maryland law, not all breaches of contract rise to the level of an unconstitutional impairment.
Finally, the City contends that Ordinance 10-306’s substitution of the tiered COLA for the Variable Benefit was a prospective change as to the Retired and Retirement-Eligible Sub-classes. As the City observes, future variable benefits “were entirely contingent on market performance.” Thus, according to the City, the Retired and Retirement-Eligible Plan members did not have vested rights to any future Variable Benefits: “In this Court’s words in Saxton, the ‘defined contingencies’ – the declaration and calculation of a variable benefit in the future – had not yet happened.”
We disagree with the City’s characterization of “the declaration and calculation” of a future Variable Benefit as a “defined contingency” that had to occur before the Retired and Retirement-Eligible Sub-classes would have a vested right with respect to receipt of such a Variable Benefit. What Saxton had in mind as a defined contingency was an act of the employee that triggered the requirement of the government-employer to provide the promised benefit(s). In Saxton, it was the death of a member in service from injuries sustained in the line of duty that entitled a surviving spouse to receive a special death benefit. In Quinn, it was the retirement of a police officer “in good standing” who had servеd on the force for a period of 20 consecutive years (or for a shorter period of time, in which case the officer would receive prorated benefits). In this case, a Plan member’s attainment of Service Retirement eligibility (reaching 50 years of age or accruing 20 years of service (with somewhat different rules for membership beginning on or after July 1, 2003)) triggered their entitlement to any future Variable Benefits that were required to be paid based on investment performance.
To conclude our analysis of this argument and the City’s claim of error in its entirety, we again turn to the circuit court’s ruling:
The City argues that “Ordinance 10-306 did not retroactively withdraw any [Variable Benefit] raises” paid since the Variable Benefit was adopted in 1983. “Rather, it adopted a different mechanism for providing future raises.” Therefore, “no ‘rights which have accrued under the terminated plan’ – i.e., the variable benefit – were ‘retrospectively withdrawn’ from the retirees.” …. In the opinion of this court, the City has the wrong end of the stick.
In addressing the pro rata pension benefits at issue there, the Quinn court determined that “future benefits vested as they were proratedly earned.” Quinn, 35 Md. App. at 630. The proportionate prorating provision of the old plan “act[ed] as an express assurance to the employees that pension benefits
they have earned by satisfactory service cannot be divested.” Id. Likewise, for Plan members who have satisfied all terms of service to earn, or to be entitled to earn, the Variable Benefit, prior to the effective date of Ordinance 10-306, their rights in same vested absolutely. The notion that by virtue of the Variable Benefit’s market driven nature, Retired and Retirement-Eligible Sub-Class members, despite having satisfied all terms of service and defined contingencies, nevertheless float from one year to the next in some undefined, ethereal
place, with the barest tether to entitlement – neither vested and yet not quite non-vested – is unpersuasive. Likewise, to reduce earned or accrued pension benefits to cash in hand or bust defies logic and flies in the face of controlling law. In sum, inasmuch as Retired Sub-Class members were entitled to, and receiving, Plan benefits as of the effective date of the Ordinance …, the court is not persuaded by the City’s argument that the Ordinance does not retroactively impair or diminish the rights or benefits of these Class members under the Plan. Further, as Retirement-Eligible Sub-Class members were eligible to retire as of the effective date of the Ordinance, but not entitled to receive Plan benefits solely because they remained working …, the court is not persuaded by the City’s argument that the Ordinance does not retroactively impair or diminish the rights or benefits of these Class members under the Plan. Instead, … the court finds that the City, by way of the Ordinance, breached its contract with Retired Sub-Class and Retirement-Eligible Sub-Class members by unlawfully withdrawing or removing previously earned and accrued benefit entitlements, specifically the Variable Benefit.
We cannot say it any better. We affirm the circuit court’s determination that the City breached its contract with the Retired and Retirement-Eligible Sub-classes.
3. The City Did Not Breach Its Contract with the Active Sub-Class.
Appellants argue that the circuit court incorrectly determined that the City did not breach its contract with the Active Sub-class. Primarily, Appellants contend that the court erred in holding that the City had a reserved power to modify the contract to serve the public interest, notwithstanding the language in § 42 promising not to diminish or impair pension benefits. Thus, according to Appellants, the circuit court should not have
undertaken a “reasonable or necessary” analysis with respect to Ordinance 10-306’s effect on the Active Sub-class. To the extent such an analysis was appropriate, Appellants argue that the circuit court erred in concluding that Ordinance 10-306 gave the Active members substantially the program they had bargained for.
The City responds that it was entitled to modify the Plan because, unlike the Retired and Retirement-Eligible members, the Active members had not yet satisfied the “defined contingencies” before the enactment of Ordinance 10-306. According to the City, the changes to the Plan as to the Active members were all prospective, and § 42 does not eviscerate the City’s reserved power to make such reasonable and necessary prospective changes to the Plan. A contrary interpretation, the City argues, would render Article 22 void ab initio, as the City cannot bargain away its legislative powers. Finally, the City asserts that the circuit court thoroughly compared the old Plan to the Plan as it existed after enactment of Ordinance 10-306 and correctly concluded that the Active members received substantially the same program under the new Plan, but to the extent there was a diminution, it was more than justified by countervailing equities involving the welfare of the City.
We agree with the City that there was no breach of contract as to the Active Sub-class. The City has the reserved legislative authority to make unilateral prospective
modifications to the Plan, provided that the substitutions are reasonable and necessary.
Section 42 does not and cannot bargain away this reserved power. Thus, the circuit court
properly considered whether the prospective changes to the Plan were reasonable and
necessary. We agree with the circuit court’s findings and conclusions
reasonableness and necessity of the changes to the Plan that the City Council made when it enacted Ordinance 10-306.
a. The City Has the Reserved Legislative Power to Make Reasonable and Necessary Prospective Modifications to the Plan That Cannot Be Bargained Away.
As discussed above, Saxton and Quinn demonstrate that, while a governmental employer may not retrospectively divest an employee of earned pension benefits, it has the reserved legislative authority to make reasonable and necessary prospective modifications to a Plan before the happening of the Plan’s “defined contingencies.” See Saxton, 266 Md. at 694; Quinn, 35 Md. App. at 630-31. This reserved legislative power exists whether or not the operativе statute expressly references it. See City of El Paso v. Simmons, 379 U.S. 497, 508 (1965) (“Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order.”); Baker, 487 F. Supp. at 468 (“The power of the legislature under applicable state law to modify its own pension contracts is part of each pension plan which a legislature enacts, whether explicitly included or not.”); see also Hughes, 594 F. Supp. at 1362 (where a contract concerns “the level of compensation to be paid State employees … for their services to the State,” it is “not one
as to which one legislature can bind subsequent legislatures for work and services to be performed by State employees … in the future”) (emphasis in original).20
Appellants contend that § 42 of Article 22 changes the calculus. That provision states: “Upon becoming a [member of the Plan], … such member shall thereupon be deemed to have entered into a contract with the Mayor and City Council of Baltimore, the terms of which shall be the provisions of this Article 22, as they exist at the effective date of this ordinance, or at the time of becoming a member, whichever is later, and the benefits provided thereunder shall not thereafter be in any way diminished or impaired.” (Emphasis added). Appellants effectively assert that, with respect to each member of the Plan, § 42 provides immediate vesting of the benefits that exist in the Plan at the time the member enrolls by promising not to make prospective changes.
Another notable provision that is found in these other two plans that is missing from the City’s Plan are “vesting” clauses. In Baltimore County, an employee’s benefits vest after successful completion of 10 years of service. Baltimore Cty. Code, § 5-1-101(8)(ii). This is a pro rata vesting clause similar to the clause at issue in Quinn. In Anne Arundel County, the members accrue rights to the plan’s benefits and the County expressly provides that any amendment or termination “may not adversely affect accrued benefits as of the effective date of the amendment or termination.” See id. §§ 5-1-103(a), 5-1-101(36). If the Plan in this case had specifically provided that members accrue benefits on a pro rata basis, this case would resemble Quinn. That is, any change to an Active member’s benefits in such an instance would be partially retrospective and partially prospective.
We do not read § 42 as Appellants do. Section 42 explicitly states that a contractual
relationship exists between the City and each plan member. It does not speak specifically
to any particular benefit set forth in the Plan. The general statement in § 42 that the
“
Thus, contrary to Appellants’ contention, § 42 is not analogous to the pro rata accrual provision at issue in Quinn. That pro rata provision created vested rights as the employees worked as police officers over the course of their careers. Each year, a greater percentage of their pension became vested, and any future change to the pension plan by the City of Frederick could not divest the officers of the accrued portion. Here, in contrast, the benefits set forth in the Plan do not vest until the members reach Service Retirement eligibility. Once they meet that condition precedent, as we have held above, the City may not retrospectively diminish or impair them. However, until the members reach Service Retirement eligibility, the City may make modifications to the Plan, provided they are reasonable and necessary.
Accepting Appellants’ interpretation of § 42 would result in a contract that is void as аgainst public policy. We generally are hesitant to invalidate voluntary bargains on public policy grounds, and thus we do so “only in those cases where the challenged agreement is patently offensive to the public good, that is, where ‘the common sense of the
entire community would ... pronounce it’ invalid.” Maryland–Nat’l Capital Park & Planning Comm’n v. Washington Nat’l Arena, 282 Md. 588, 606 (1978) (quoting Estate of Woods, Weeks & Co., 52 Md. 520, 536 (1879)). However, if we were to interpret § 42 as Appellants suggest, we indeed would be confronted with a contract that is patently offensive to the public good.
As noted above, where a statutory contract concerns the level of compensation to be paid to public employees for their services to the governmental body, the enacting legislature cannot bind subsequent legislatures for work and services to be performed by the employees in the future. Hughes, 594 F. Supp. at 1362. Treating such a contract as “irrevocable” would render it void ab initio since it would have “surrender[ed] an essential attribute” of the government’s sovereignty – i.e., the police power, which the “legislature cannot bargain away.” Id. at 1360 (quoting United States Trust Co. v. New Jersey, 431 U.S. 1, 23 (1977)); see also Montgomery Cty. v. Bigelow, 196 Md. 413, 423 (1950) (“The legislature cannot by statute ‘preclude’ the repeal of any statute by a subsequent legislature.”). Appellants construe § 42 as rendering the terms of the Plan irrevocable as to current members whose benefits have not vested. That construction would render the Plan void ab initio for violating the reserved powers doctrine. See State v. Good Samaritan Hosp. of Md., Inc., 299 Md. 310, 319 (1984) (“It is well settled that the Contract Clause must be accommodated to the inherent police power of a sovereign state to protect the general welfare of its people.”). The public policy implicated by Appellants’ argument is the need for local governments to retain the ability to legislate for the public good – an essential element of their sovereignty. In sum, our interpretation of § 42 is reinforced by
the
Harford County v. Town of Bel Air, 348 Md. 363 (1998), relied upon by Appellants, is not to the contrary. Appellants cite Harford County for the proposition “that municipal contracts are not subject to modification based on the public interest.” In Harford County, we rejected the County’s governmental immunity defense to the Town of Bel Air’s claim. The County asserted, as its primary argument, that it was “entitled to abrogate its obligations under a contract entered into in performance of a governmental function if dictated by the public good.” 348 Md. at 370 (internal quotation marks omitted). We restated this Court’s consistent position that “counties and municipalities have never been granted immunity in contract actions.” Id. at 373. We distinguished two cases involving the constitutionality of legislative actions that repealed statutes, noting that
[t]he holdings in both cases were that the subsequent repealing statutes did not violate the Contract Clause because the earlier statutes did not grant or authorize such vested contract rights that would be protected by the Contract Clause. The references to governmental purposes and “public good” in both opinions were integral parts of the holding that the subsequent repealing statutes were valid under the Contract Clause. Such references did not
constitute any recognition of local governmental immunity from suit in contract actions.
Id. at 380. Therefore, we held that the County “has no governmental immunity in contract actions or in declaratory judgment actions relating to contractual rights and liabilities,” id. at 373, even if the County abrogated its contractual obligations for “public good.” Id. at 370.
Harford County does not mention the reserved powers doctrine, let alone abrogate Saxton and Quinn. We agree with the City that “the type of contracts at issue (waste disposal) or discussed (construction) in Harford County are fundamentally different from pension plans that purport to tie a municipality’s hands for decades to come … and which threaten its ability to provide core services to its citizens. Given their ‘multifaceted’ nature, as they are basеd on ‘actuarial assumptions which may or may not turn out to be accurate,’ pensions are simply different from other government contracts.”
Having correctly determined that the City had the authority, notwithstanding § 42, to make reasonable prospective modifications to the Plan, the circuit court undertook an analysis of the reasonableness and necessity of those modifications. We now turn to that analysis.
b. The Circuit Court Correctly Concluded That Ordinance 10-306 Was Reasonable and Necessary.
After conducting a lengthy trial, the circuit court found that Ordinance 10-306’s changes were reasonable and necessary and concluded that the City did not breach its contract with the Active members. We agree with the circuit court’s ruling.
Tracking the points the Quinn Court opined were relevant in assessing the validity of a prospective change to a pension plan, the circuit court made numerous findings of fact in its Memorandum Opinion.
- At the time Ordinance 10-306 was passed, the City’s “dire financial and related circumstances extended to all City residents.”
- “At the time the City adopted Ordinance 10-306, the Variable Benefit was unsustainable as a method of providing post-retirement benefit increases.”
- “[C]ontinuation of the Plan unchanged would, in relatively short order, cannibalize the Plan’s basic benefit.”
- Action to improve the actuarial soundness of the Plan was necessary at the time Ordinance 10-306 was enacted; “[t]he objectively verifiable and undisputed facts are that the City was in financial free fall; and – critically – even had the City not been in financial crisis, the Plan judged on its own merit was actuarially unsound and plainly unsustainable…. This was not theory subject to debate. This was reality. The Plan was unsound, unsustainable, and the City simply had to do something to turn it around.”
- “[W]hen it appeared inevitable that legislative changes would be made, the [police and firefighter] unions acknowledged that the City could not afford to repair the funding level of the Plan by reducing the post-retirement assumed rate of return to five percent. The unions proposed scrapping the Variable Benefit entirely in favor of a plan that included a fixed COLA and increasing employee contribution requirements by three percent (to nine percent) spread over an equal number of years.”
- The testimony of the City’s expert witnesses was “credible, persuasive, and helpful, occasionally to the point of enlightening” concerning the “trajectory of the Plan (including the state of Plan assets) had it not been modified by law.” The testimony of the Appellants’ expert witnesses was not “comparatively credible or persuasive.”
- “[T]he City was unable to absorb the nearly $62 million cost to the General and Motor Vehicle Fund budgets that would have resulted had the City modified the post-retirement assets earning investment rate from 6.8 to five percent as recommended[.]” And “additional tax revenue was effectively unavailable to resolve the problem, given the already tapped tax base of the City.”
- PFM, the City’s outside consultant, “advised the City in 2010 that 10-306 as proposed (and later adopted) would enhance the Plan’s integrity and improve its [actuarial] soundness by enabling unfunded liabilities to be paid down.”
- Ordinance 10-306 was reasonably intended to preserve the integrity of the Plan by enhancing its actuarial soundness.
- The new 0-1-2 COLA, which replaced the Variable Benefit, “was properly intended to provide increases in income at stages of life when the City determined members were most likely not to have secondary employment or alternative sources of income[.]”
- Under the revised Plan, the City became a guarantor of the 0-1-2 COLA and all past Variable Benefit payments; the City previously did not guarantee Variable Benefit payments.
-
“[U]nder the revised Plan, for the first time, the Plan provides a minimum annual benefit for qualifying spousal beneficiaries[.]” - The new Plan “grandfathers certain Plan members into pre-Ordinance Service Retirement eligibility criteria” and “includes a new early retirement benefit enabling non-grandfathered Plan members to retire at pre-10-306 Service Retirement eligibility dates[.]”
- “[U]pdated levеls of employee contribution increases are phased in over several years[.]”
- “[T]he revised Plan grandfathers into pre-10-306 DROP 2 eligibility those with qualifying years of service[.]”
- “[T]he revised Plan grandfathers into pre-10-306 AFC calculation those with qualifying years of service.”
- Several “countervailing public equities” existed at the time the City Council modified the Plan, including:
- The existence of “woefully anemic core services” following “shocking reduction in life-saving public essentials like fire-fighting and police units to important basic public health and welfare-related waste disposal services”; “these core service cuts, necessitated in large part by the nation’s financial circumstances that had overcome the City, placed the City’s residents in peril.”
- “[E]nsuring the City has the capacity to continue to pay the basic Plan benefit is, itself, an important public equity… . The Plan, if left unmodified, was on track to run out of assets – not in theory, but with near certitude; not in some far off future, but in the relative near term.”
- The City’s expert witnesses were also “credible and persuasive on the subject of the impact of the comparative differences of the pre- and post-10-306 Plan on the Class (and Sub-Classes).” Appellants’ experts’ opinions “were neither credible nor persuasive on the question of whether the post-10-306 Plan provides Active Sub-Class members substantially the Plan they bargained for at the start of employment.”
- Plan members who met pre-10-306 Service Retirement eligibility as of June 30, 2010, as well as members with 15 or more years of covered service as of June 30, 2010, are grandfathered into pre-10-306 Service Retirement eligibility criteria.
- “[T]he increase in the minimum service requirement from 20 to 25 years for non-grandfathered employees will most likely impact a minority of employees in their retiring planning horizon, by one to at most five years; and, for these employees, the resulting pension at retirement with 25 years of service would be larger than they would have received retiring with 20 to 24 years of service under pre-10-306 provisions.”
- Regarding the impact оf the AFC calculation, “employees retiring with 25 or more years of service who did not receive a pay increase in the final two years of employment would have received the same retirement benefit under the pre-10-306 Plan as they will receive under the revised Plan. For those affected by the change in AFC calculation,
the paid benefit remains substantially the same.” - The new COLA provides “predictability and reliability” and, therefore, “stability in a way the Variable Benefit cannot given its market dependency.”
- “[A]s far as hard dollars are concerned, the COLA measures up well to the Variable Benefit.” As the City’s expert explained (and the circuit court credited), “[t]he age-based COLAs are expected to deliver larger increases over an employee’s lifetime than under the variable benefit provisions prior to Ordinance 10-306. Accordingly, the lifetime income under 10-306 is expected to be reasonably equivalent (and certainly more predictable) than the benefits that would have been payable had Ordinance 10-306 not been adopted.”
- The “actual effect the [tiered] COLA has had on retiree benefits (versus the Variable Benefit) since the Ordinance passed[] … further solidifies the court’s conclusion that the post-10-306 Plan provides Active Sub-Class members the substantial benefit of their bargain.”
- Ordinance 10-306 “made reasonable prospective modifications to the Plan’s terms, including Plan benefits affected by the Ordinance…. [T]he prospective modifications to Plan benefits were balanced by a combination of essential and overwhelming public welfare considerations, and new benefits or qualifying conditions. The Ordinance was ‘a reasonable change promoting a paramount interest of the State without serious detriment to the employee.’ Quinn, 35 Md. App. at 631.”
Based on our review of the record, we perceive no clear error in the circuit court’s factual findings or any legal errors in the court’s analysis. We cannot say that the circuit court erred in accepting the opinions of the City’s experts and rejeсting the opinions of Appellants’ experts concerning the state of the City’s finances at the time of the Ordinance’s enactment and the comparison of pre- and post-10-306 Plans. We also find it significant that, during the negotiations prior to 10-306’s enactment, the unions expressed their agreement that the Plan was in trouble and that the Variable Benefit should be eliminated and replaced with a COLA that was not market-driven. The unions also suggested increasing employee contributions. While the parties ultimately could not agree on the specific changes that should be made to the Plan, spawning more than a decade of
litigation, there is no dispute that the Plan urgently needed to be changed to ensure its actuarial soundness.
In sum, we are satisfied that the circuit court correctly concluded that: (1) the Ordinance was reasonably intended to preserve the integrity of the Plan; (2) the changes to the Plan, as they affected the Active members, were reasonable changes promoting a paramount interest of the City without serious detriment to the employee; (3) post-10-306, the employees received substantially the Plan they bargained for; and (4) to the extent any benefits were lessened or other terms became more onerous, those changes were balanced by a combination of overwhelming public welfare considerations and new benefits or qualifying conditions.
We emphasize the “and” in the preceding sentence to highlight an important clarification to Quinn. In Quinn, the Court of Special Appeals stated that “the employee must have available substantially
undoubtedly had given the best years of their careers to Baltimore City, serving the public daily in dangerous and stressful jobs. Although a governmental employer always retains its reserved power to make prospective changes to a public pension plan, it may make such changes only if any resulting diminutions in benefits are balanced by countervailing public equities and the addition of other benefits/terms, which provide the employees with substantially what they bargained for. Put another way and more simply, a prospective change to a pension plan must be both reasonable and necessary.21
In this case, the circuit court correctly found that, with respect to Active members, the changes to the Plan were balanced by “a combination of essential and overwhelming public welfare considerations, and new benefits or qualifying conditions.” In other words, Ordinance 10-306’s changes were reasonable and necessary. Accordingly, we affirm the circuit court’s determination that the City did not breach its contract with the Active Sub-class.
C. The Circuit Court Did Not Err in Calculating the Damages Awarded to the Retired and Retirement-Eligible Sub-Classes.
As discussed above, by enacting Ordinance 10-306, the City breached its contract with the Retired and Retirement-Eligible Sub-classes. As a remedy for the breach, the
circuit court declined to order specific performance – i.e., reinstitution of the Variable Benefit for the Retired and Retirement-Eligible Sub-classes22 – but rather calculated the monetary damages the City owes to the Retired and Retirement-Eligible Sub-classes as a result of 10-306’s replacement of the Variable Benefit with the tiered COLA.
Appellants contend that the circuit court erred in calculating the damages the City owes to these two Sub-classes by relying on incorrect assumptions made by the City’s expert witness, Adam Reese, and rejecting the testimony of Appellants’ experts, Thomas Lowman and Colin England. Perceiving no clear error in the circuit
As stated above, we review the factual findings of the circuit court for clear error and must consider the evidence in the light most favorable to the prevailing party and decide not whether the trial judge’s conclusions of fact were correct, but only whether they were supported by a preponderance of the evidence. See City of Bowie, 398 Md. at 676; Urban Site Venture II Ltd. P’ship, 340 Md. at 229-30.
The circuit court did not find Appellants’ expert witnesses, Messrs. Lowman and England, to be “credible or persuasive on the issue of what assumptions, bases and projections should be applied to calculate damages of the Retired and Retirement-Eligible Sub-Class members.” The court offered multiple reasons for this finding. “One of the primary reasons” was Appellants’ experts’ “reliance on a five percent post retirement assets earnings assumption rate as the basis for a significant portion of their determination of what
the prevailing Class members would have received had the Variable Benefit remained in place,” despite the fact that the City Council never voted to reduce the rate from 6.8% to 5% prior to the enactment of Ordinance 10-306, which had “the effect of materially inflating damages without basis in fact.”
In addition, as the circuit court explained, as to the over $400 million in losses due to the technology bubble burst, Appellants’ experts assumed “that the City recognized those losses between 2002 and enactment of the Ordinance, resulting in hundreds of millions of dollars in City Plan contributions. This did not happen and, even were the court to allow that double smoothing was chicanery, the notion that the City had even a fraction of that capacity is rather a whopper of a departure from reality.” The court concluded that “attributing those extra contributions to the retirees’ reserves (the PRF and the ARF) until they are fully funded, which wildly skews the amount of Variable Benefit in favor of Plaintiffs[,] does not reflect how Plan assets were actually accounted for among the pre-10-306 Plan funds; nor is it required by the Plan language.”
Moreover, the circuit court found, Appellants’ experts ignored “the well-documented, deliberate Board practice of not tethering the Variable Benefit conversion rate to the post-retirement investment rate given the reality of the bond market (i.e., not yielding returns on par with the statutory 6.8% assumed investment rate) and the importance of avoiding volatile investments for retirees reserves” and instead used “a 6.8% conversion rate — which ha[d] the effect of enhancing Plaintiffs’ damages without suitable explanation of the presumed hike in rate.” The court also took issue with Appellants’ experts’ assumptions that employee contributions from workers hired on or after July 1, 2010, and
associated employer contributions for those new hires, would be included in calculating Variable Benefit increases, despite new hires not being entitled to the pre-Ordinance 10-306 Plan terms and benefits. Lastly, the court determined the basis for Appellants’ volatility forecast and projections for future investment returns to be “outdated, outmoded, and unrealistically reliant on rarefied air of investment returns in ranges well above 40% in some years.”
The court summarized Appellants’ experts’ damages analysis as building upon Appellants’ “breach by underfunding argument to calculate damages on a multi-faceted foundation of hundreds of millions of dollars in phantom City contributions (and capacity), an overly robust 6.8% conversion rate, post-10-306 new employee and employer contributions, and by booking
In sum, in the opinion of the court, Plaintiffs’ damages theory is unsupported by historic fact and is unaccompanied by persuasive explanation why the court should go along with these assumptions. Plaintiffs’ theory is also unavailing as a matter of law, as it purports to place the prevailing Class members in a considerably better position than had the Plan not been modified. Contract law does not countenance a windfall for aggrieved parties, but rather mandates their position be righted.
In contrast, the circuit court found the City’s expert, Mr. Reese, to be “credible, persuasive, and helpful to the court on the issue of the appropriate assumptions, bases and projections to utilize in determining what damages, if any, the Retired and Retirement-Eligible Sub-Class members are entitled, both pre- and post-final judgment.” According to the court, the City’s damages analysis “is based on terms of the pre-10-306 Plan and the
City’s documented, known, and Board-approved practices in place just prior to Plan modification” and its calculations “provide outcomes based on assets actually in the Plan when the modification was enacted and on a closed pre-10-306 Plan.” Therefore, the court concluded that “[t]he City’s proposed damages bases and assumptions ensure, to the degree possible, the members of the Retired and Retirement-Eligible Sub-Classes will receive the Variable Benefits they would have received had the Plan not been modified.”
Having considered the testimony of the experts from both parties, the circuit court determined that calculations of damages would follow the City’s model:
The court will, therefore, apply the City’s proposed assumptions, projections and overall method of calculating Variable Benefits the members of the Retired and Retirement-Eligible Sub-Classes would have received from the effective date of Ordinance 10-306 to the date of final judgment (including known FY 2010 through FY 2017 investment performance), and thereafter, reduced to present value. The pre-10-306 Plan will bе treated as closed to new employees and new retirees following June 30, 2010, and calculated damages will implement Mr. Reese’s Variable Benefit averages based on his 20 trials and shall be based on the amortization period and method in place in June 2010.
Appellants argue that, by relying on Mr. Reese, the circuit court erred in its determination of how to calculate “Variable Benefit” increases if Ordinance 10-306 had not been passed, which dramatically reduced the damages award in this case. According to Appellants, the court erred by accepting Reese’s hypothetical two-plan model (Closed Plan and New Plan) to measure damages. Appellants also assert that the court erred by assuming that the Board of Trustees would not have acted to ensure that the retiree reserves in the PRF were fully funded.
In addition, Appellants challenge the court’s assessment of their experts’ analysis as neither credible nor persuasive. Appellants contend it was reasonable for Appellants’ experts to assume that the City would have adopted the 5% post-retirement earnings assumption rate “based upon the Mayor’s testimony that the City would have had no choice but to adopt this rate and make an increased contribution to the Plan in the absence of a reduction of benefits.” Moreover, according to Appellants, it was reasonable for their experts to assume that the Board of Trustees would
The City counters that Mr. Reese’s model was an accurate damages model based on a hypothetical “but for world” that assumed no breach and separated the Sub-classes into two categories – those in the “Closed Plan” (Retired аnd Retirement-Eligible Sub-class members) and those in the “New Plan” (Active Sub-class members and members who joined the Plan on or after July 1, 2010). According to the City, Mr. Reese’s model was based on Article 22 and actual past practice, which “showed conclusively that most retirees have fared and are expected to fare better under Ordinance 10-306’s guaranteed COLAs than under the previous variable benefit.”
Appellants contend that the dispute over the analysis by the respective experts rests on questions of contract interpretation, and that we therefore should review without deference the circuit court’s “credibility” determinations as to the competing experts.
Assuming without deciding that de novo review applies to the circuit court’s choice of assumptions to apply in the damages calculation, the result is no different.
As explained above, the pension benefits of the Retired and Retirement-Eligible Sub-classes fully vested prior to the enactment of Ordinance 10-306. Having vested, any change to the pension benefits cannot “be diminished or impaired” under § 42. In this sense, the Retired and Retirement Eligible Sub-Classes are “closed” from changes enacted by Ordinance 10-306. However, as the court found and we have affirmed, the City was permitted to apply the new COLA to the Active Sub-class (and, of course, to members who were hired after the enactment of the Ordinance). In this sense, the members of the Active Sub-class and new hires work in the “new” world of the COLA increase under Ordinance 10-306.
With this framework in mind, the circuit court’s acceptance of Mr. Reese’s two-Plan construct comes into better focus.23 Appellants believe that the Retired and Retirement-Eligible Sub-classes’ damages should be assessed under a hypothetical post-June 30, 2010 Plan in which there were no prospective changes made to the Plan as to the Active members and new hires. But the circuit court was correct not to measure damages in that way. The City had the power to make the prospective changes that it did. Moreover,
as the circuit court found, if the City had not made those prospective changes, the Plan would have run out of funds to pay the basic benefit to Plan members in the near term. For these reasons, it was appropriate for the court to accept Mr. Reese’s assumptions, which accounted for different Plans for the “closed” group and the “new” group. The court correctly rejected Appellants’ experts’ pie-in-the-sky one-group Plan; such a hypothetical Plan would have self-destructed, leaving the Retired and Retirement-Eligible members with no pension at all.
In sum, we conclude that Mr. Reese’s damages model provided the circuit court with an accurate assessment of how the members of the Retired and Retirement-Eligible Sub-classes would have fared if, hypothetically, the City had retained the Variable Benefit for them but made the prospective changes to the Plan for other members that we have held the City was permitted to make. This is the proper measure of damages, given that the
actual Plan at all times includes some members whose rights to benefits have vested and others whose rights to benefits have not yet vested.
Mr. Reese’s analysis, based on assumptions that we have found are correсt, provides “competent material evidence” to support the circuit court’s factual findings as to damages. Because there is competent material evidence to support the findings of the circuit court, no clear error exists here, and we therefore affirm the circuit court’s damages calculation for the Retired and Retirement-Eligible Sub-classes.
IV
Conclusion
The record makes clear that the City took no pleasure in modifying the Plan with the enactment of Ordinance 10-306. The City was faced with a lose-lose proposition: either change the terms of the Plan and incur the wrath of its members, or allow the unsustainable Plan eventually to consume itself from within, harming the Plan members and all City residents. The City opted for the former approach. As to the Active Sub-class, Ordinance 10-306’s changes made reasonable and necessary prospective changes. Thus, the City did not breach its contract with the Active Sub-class. However, the Ordinance retrospectively divested Retired and Retirement-Eligible members of the benefits they had earned by reaching Service Retirement eligibility. The City breached its contract with those Sub-classes and is liable for damages to the members as calculated and ordered by the circuit court.
For the reasons stated above, we affirm the judgment of the Circuit Court for Baltimore City.
JUDGMENT OF THE CIRCUIT COURT FOR BALTIMORE CITY AFFIRMED. COSTS TO BE DIVIDED EQUALLY BETWEEN THE PARTIES.