Lorraine SPILLER, et al. v. STATE of Maine, et al.
Supreme Judicial Court of Maine.
June 23, 1993
627 A.2d 513
Argued May 19, 1993.
Cabanne Howard (orally), Asst. Atty. Gen., Augusta, for defendants.
Before WATHEN, C.J., and ROBERTS, GLASSMAN, CLIFFORD, COLLINS, RUDMAN and DANA, JJ.
CLIFFORD, Justice.
Defendants, the State of Maine and certain named officials, appeal from a judgment of the Superior Court (Kennebec County, Chandler, J.) declaring unconstitutional legislative modifications made to the statutes establishing pension benefits for state employees and enjoining enforcement of those modifications. Because the statutory changes do not impact any constitutionally protected rights of the plaintiffs, we vacate the judgment.
Plaintiffs are the Maine State Employees Association and a certified class of all current and former state employees whose employment commenced prior to enactment of the modifications and who did not have seven years of creditable service on December 1, 1991.1 The employees are members of the Maine State Retirement System. The system was created in 1942 for the purpose of encouraging “qualified persons to seek public employment and to continue in public employment during their productive years.”
In 1991, state government experienced a significant shortfall in revenue, and as part of an effort to reduce state expenditures to close the gap between revenues and expenditures, the legislature modified the prospective retirement benefits for all state employees with fewer than seven years of creditable service as of December 1, 1991. P.L.1991, ch. 591, § EEE (codified at
Plaintiffs brought this action in the Superior Court seeking a declaratory judgment that the modifications violate the contract clauses of the Maine and United States Constitutions5 and requesting injunctive relief.6 The parties stipulated to the essential facts and moved for a summary judgment. The court construed the retirement statute to give to plaintiffs, on acceptance of employment, contractual rights to pension benefits and concluded that the modifications substantially impaired those rights. Although the court found that the goal of reducing the state‘s deficit was a significant and legitimate public purpose, it did not find that the impairment of rights was reasonable and necessary to accomplish that purpose. Accordingly, the court held that the statutory modifications violated the contract clauses of both the Maine and United States Constitutions. This appeal followed.
In this case, there is no dispute about the historical facts and the court properly entertained the motions for summary judgment. Lewiston Bottled Gas Co. v. Key Bank, 601 A.2d 91, 93 (Me. 1992). At issue is the construction of the statutory scheme establishing pension benefits, that is a question of law for the court. Maine Beer & Wine Wholesalers v. State, 619 A.2d 94, 97 (Me.1993). “[L]egislative enactments are presumed constitutional and the party challenging the constitutionality of a statute bears the burden of proof.” Maine Beer & Wine Wholesalers, 619 A.2d at 97. Under time honored rules of construction, a statute will not be presumed to create contractual rights, binding future legislatures, unless the intent to do so is clearly stated. National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451, 465-66 (1985). See also Dodge v. Board of Educ., 302 U.S. 74, 78-79 (1937) (statute providing annuities for retired teachers not a contract); Pineman v. Oechslin, 195 Conn. 405, 488 A.2d 803, 809 (1985) (state employees retirement act did not create contractual rights); Fumarolo v. Chicago Bd. of Educ., 142 Ill.2d 54, 153 Ill.Dec. 177, 200, 566 N.E.2d 1283, 1306 (1990) (statute establishing tenure for school principals did not create a contractual right).
[A]bsent some clear indication that the legislature intends to bind itself contractually, the presumption is that “a law is not intended to create private contractual or vested rights but merely declares a policy to be pursued until the legislature shall ordain otherwise.” This well-established presumption is grounded in the elementary proposition that the principal function of a legislature is not to make contracts, but to make laws that establish the policy of the state. Policies, unlike contracts, are inherently subject to revision and repeal, and to construe laws as contracts when the obligation is not clearly and unequivocally expressed would be to limit drastically the essential powers of a legislative body.
National R.R. Passenger Corp., 470 U.S. at 465-66 (quoting Dodge
In the retirement statute being construed here, not only is there no clear indication of a legislative intent to create immutable contractual rights for all state employees, the statutory language compels a contrary conclusion. Sections 17050 and 17051,7 relied on by the plaintiffs, do not create contractual rights. Rather, they state general policy principles, none of which are changed by the enactment of P.L.1991, ch. 591, § EEE. In addition, section 17801 provides that it is only those retirement benefits that “would be due to a member ... on the date immediately preceding the effective date of the amendment” that cannot be reduced by amendment to the retirement statute.8 By implication, the language reserves to future legislatures the power to modify prospective service retirement benefits for employees to whom benefits are not then due. None of the benefits at issue here were due to any plaintiff on the effective date of this legislation.
Although a number of courts have employed a contract analysis, a careful reading of the cases reveals the diversity of circumstances in which the analysis arises.9 Even in jurisdictions that have decided contractual rights may be implied from a statutory scheme, there is no consensus about when such rights arise.10 We are unpersuaded by the reasoning of those jurisdictions that have discerned in the statutory language the creation at the time of employment of binding contractual rights. See, e.g., Betts v. Board of Administrators of Pub. Employees Retirement Sys., 21 Cal.3d 859, 148 Cal.Rptr. 158, 582 P.2d 614 (Cal.1978). Our retirement statute con-
Although we reject the Superior Court‘s conclusion that the retirement statute creates immutable contractual rights on acceptance of employment that cannot be impaired under the contract clauses of our constitutions, retirement benefits are more than a gratuity to be granted or withheld arbitrarily at the whim of the sovereign state.12 See Note, Public Employee Pensions in Times of Fiscal Distress, 90 Harv.L.Rev. 992, 994-95 (1977).
Although one may conclude that it was unnecessary or even unwise for the legislature to have enacted P.L.1991, ch. 591, § EEE, it is not for this court “to substitute its opinion on the merits or desirability of the legislation for that of the legislature.” Pineman v. Fallon, 662 F.Supp. at 1317. Rather, it is for us to determine if the amendments are unconstitutional. In this instance, there is no constitutional violation.
The entry is:
Judgment vacated. Remanded to the Superior Court for entry of a judgment for defendants.
ROBERTS, COLLINS, RUDMAN and DANA, JJ. concurring.
WATHEN, Chief Justice, with whom GLASSMAN, Justice, joins, dissenting.
We respectfully disagree that plaintiffs have no contractual right to benefits under the state pension system. The Court‘s opinion defeats the legitimate expectations of public employees and defeats the purposes for which the Legislature created the retirement system. The Court‘s holding should come as a surprise to the State because it acknowledged that it had a contractual relationship with plaintiffs to provide pension benefits. In our view, the statutory pension system and the relationship between the State and its employees clearly establish a contractual obligation to provide an undiminished level of benefits, and we reject the State‘s argument that the facts of the present case justify a unilateral reduction of those contractual benefits.
We agree that plaintiffs carry the burden of overcoming a presumption that a statute does not create contractual rights. The Court fails to recognize, however, that this time-honored rule of construction is a presumption only. The Court gives no consideration in this regard to the nature of a pension system as deferred compensation, (see Annotation, Vested Right of Pensioner
The principal function of a legislative body is not to make contracts but to make laws which declare the policy of the state and are subject to repeal when a subsequent legislature shall determine to alter that policy. Nevertheless, it is established that a legislative enactment may contain provisions, which when accepted as the basis of action by individuals, become contracts between them and the State or its subdivisions within the protection of Art I, § 10 [the contract clause of the United States Constitution].
Indiana ex rel. Anderson v. Brand, 303 U.S. 95, 100 (1938) (holding that Indiana public school teachers had a contract for continued employment based on legislative history, prior Indiana court rulings, and statutory language including the use of the word, “contract“).
The State, arguing only that plaintiffs have no legally enforceable right to a particular level of benefits and that the impairment of their contractual relationship is justified by the need to reduce state expenditures, assessed its case realistically and acknowledged a contract. The State‘s pension plan was created as a benefit to attract and retain qualified employees for public service jobs and to assist public employees in making provision for their retirement.
The Court today repudiates the history and the language of the statutory system largely on its strained conclusion that
Significantly, having rejected all contractual rights, the Court does not reach any conclusion as to what rights plaintiffs possess in pension benefits. If the inference can be drawn that plaintiffs may have a property interest in pension benefits, (see Note, Public Employee Pensions in Times of Fiscal Distress, 90 Harv.L.Rev. 992, 1003-1005 (1977)), that interest offers the protection of due process, which affords little protection from significant reductions in benefits as a result of legislative action. See United States v. Locke, 471 U.S. 84, 108 (1985) (stating that, “in altering substantive rights through enactment of rules of general applicability, a legislature generally provides constitutionally adequate process simply by enacting the statute, publishing it, and, to the extent the statute regulates private conduct, affording those within the State‘s reach a reasonable opportunity both to familiarize themselves with the general requirements imposed and to comply“); Atkins v. Parker, 472 U.S. 115, 130 (1985) (holding that food stamp benefits in which plaintiffs claimed a property inter-
The Court fails to recognize that the pension benefits of plaintiffs constitute deferred compensation for their current service. Although no express contract for pension benefits exists, the statutes and the historical record give rise to an implied contract requiring the State to discharge its obligation to pay deferred compensation by providing pension benefits. The pension benefits constitute payment for work already performed. The State‘s ability to pay this deferred compensation in the future is assured by the employees’ contributions and the State‘s obligation to annually contribute to the pension fund. “[T]he mere fact that performance is in whole or in part dependent upon certain contingencies does not prevent a contract from arising, and the employing governmental body may not deny or impair the contingent liability any more than it can refuse to make the salary payments which are immediately due.” Kern v. City of Long Beach, 29 Cal.2d 848, 179 P.2d 799, 803 (1947). By providing their services and deferring compensation, plaintiffs acquired contractual rights to a pension conditioned upon remaining in state employment for the required length of time. See Betts v. Bd. of Admin. of Public Employee Retirement Sys., 21 Cal.3d 859, 148 Cal.Rptr. 158, 161, 582 P.2d 614, 617 (1978); see also Restatement (Second) of Contracts § 45 (1979). Although the State is free to discharge employees in times of financial stress and although it may retain the right to substitute benefits of equal value, the statutory scheme implicitly obligates the State to maintain the level of benefits resulting from the contributions of the employees and the State as long as the employment continues. See Betts, 148 Cal.Rptr. at 161, 582 P.2d at 617.
The appropriate constitutional analysis therefore begins with the question whether the statutory modifications to the pension plan substantially impaired the contractual relationship between plaintiffs and the State. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411 (1983). The United States Supreme Court has measured the severity of the impairment “by the factors that reflect the high value the Framers placed on the protection of private contracts. Contracts enable individuals to order their personal and business affairs according to their particular needs and interests.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 (1978). Therefore, total destruction of contractual expectations is not required for a finding of substantial impairment, and state regulation restricting a party to gains reasonably expected does not necessarily constitute substantial impairment. Energy Reserves Group, Inc., 459 U.S. at 411.
Other courts have found substantial impairment from legislation that increases the minimum age at which retirement benefits may be paid, Christensen v. Minneapolis Mun. Employees Retirement Bd., 331 N.W.2d 740, 751 (Minn.1983); that requires state employees to take unpaid leave, Opinion of the Justices, 135 N.H. 625, 609 A.2d 1204, 1210 (1992); that defers employees’ pay, Assoc. of Surrogates and Supreme Court Reporters v. State of New York, 940 F.2d 766, 772 (2d Cir.1991); and that doubles employee contributions to a pension plan without an increase in benefits, Singer v. City of Topeka, 227 Kan. 356, 607 P.2d 467, 476 (1980). In the present case, the Superior Court correctly ruled that the reductions of benefits resulting from the modifications constitute a substantial impairment of plaintiffs’ contractual rights.
The State may yet exercise its police powers and impair the contractual relationship if it has a significant and legitimate public purpose. Energy Reserves Group, Inc., 459 U.S. at 411-12. That
Because the State is modifying its own contractual relationship, however, the modifications are subject to special scrutiny, and the Court should require a demonstration that they are reasonable and necessary to the State‘s purpose. Energy Reserves Group, Inc., 459 U.S. at 411 n. 12; United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 25-26 (1977). Necessity is assessed by examining whether a less drastic modification or alternative would have achieved the public purpose. Reasonableness is assessed by considering the circumstances and determining the degree to which the problem could have been anticipated. United States Trust Co. of New York v. New Jersey, 431 U.S. at 31-32.
The State has not demonstrated the necessity for impairing the contractual rights of plaintiffs in its choice among alternatives to close the gap between revenues and expenses. When dealing with a general deficit in the State‘s budget, the contract clauses of both the state and federal constitutions limit the State‘s ability to impair the obligations of its own contracts without resorting to more drastic reductions of noncontractual expenditures or to increasing revenues. The choice to impair contractual rights is not an equal choice among other policy alternatives. “A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.” United States Trust Co. of New York v. New Jersey, 431 U.S. at 26. This case illustrates the truth of that principle. We need not assess the reasonableness of the modifications because in our judgment the State has failed to demonstrate that the impairment of its contractual relationship with plaintiffs was necessary. Consequently, the modifications violated the contract clauses of both the Maine and United States constitutions. We would affirm the Superior Court.
Notes
It is the intent of the Legislature to encourage qualified persons to seek public employment and to continue in public employment during their productive years. It is further the intent of the Legislature to assist these persons in making provision for their retirement years by establishing benefits reasonably related to their highest earnings and years of service and by providing suitable disability and death benefits.
The Legislature shall pass no bill of attainder, ex post facto law, nor law impairing the obligation of contracts, and no attainder shall work corruption of blood nor forfeiture of estate.
No State shall ... pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
It is the intent of the Legislature to encourage qualified persons to seek public employment and to continue in public employment during their productive years. It is further the intent of the Legislature to assist these persons in making provision for their retirement years by establishing benefits reasonably related to their highest earnings and years of service and by providing suitable disability and death benefits.
No law outside of this Part which provides wholly or in part at the expense of the State or of any subdivision of the State for retirement benefits for employees, or for the surviving spouses or other beneficiaries of those employees, may apply to members or beneficiaries of the retirement system or to the surviving spouses or other beneficiaries of those members or beneficiaries. A member may not receive service credit toward a benefit under this Part and under another system supported wholly or in part by the State for the same service.
No amendment to this Part may cause any reduction in the amount of benefits which would be due to a member based on creditable service, earnable compensation, employee contributions, pick-up contributions, and the provisions of this Part on the date immediately preceding the effective date of the amendment.
Pineman v. Oechslin, 195 Conn. 405, 488 A.2d 803, 808 (1985); see also Fumarolo v. Chicago Bd. of Educ., 142 Ill.2d 54, 153 Ill.Dec. 177, 200, 566 N.E.2d 1283, 1306 (1990); Note, Public Employee Pensions in Times of Fiscal Distress, 90 Harv. L.Rev. 992, 1002 (1977).[T]he contract approach plays havoc with basic principles of contract law, traditional contract clause analysis and, most importantly, the fundamental legislative prerogative to reserve to itself the implicit power of statutory amendment and modification.