WASHINGTON EDUCATION ASSOCIATION; STACIA BILSLAND and KATHLEEN RANEY, on their own behalf and on behalf of all others similarly situated, Respondents, v. WASHINGTON DEPARTMENT OF RETIREMENT SYSTEMS; STATE OF WASHINGTON, Petitioners. WASHINGTON FEDERATION OF STATE EMPLOYEES; PAULETTE THOMPSON; BOB KELLER, and all others similarly situated, Respondents, v. WASHINGTON DEPARTMENT OF RETIREMENT SYSTEMS; STATE OF WASHINGTON, Petitioners. RETIRED PUBLIC EMPLOYEES COUNCIL OF WASHINGTON; and HOWARD N. JORGENSON, on his own behalf and on behalf of all similarly situated individuals, Respondents, v. WASHINGTON DEPARTMENT OF RETIREMENT SYSTEMS; STATE OF WASHINGTON, Petitioners.
No. 88546-0
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
AUG 14 2014
En Banc
NOTICE: SLIP OPINION (not the court’s final written decision)
The opinion that begins on the next page is a slip opinion. Slip opinions are the written opinions that are originally filed by the court.
A slip opinion is not necessarily the court’s final written decision. Slip opinions can be changed by subsequent court orders. For example, a court may issue an order making substantive changes to a slip opinion or publishing for precedential purposes a previously “unpublished” opinion. Additionally, nonsubstantive edits (for style, grammar, citation, format, punctuation, etc.) are made before the opinions that have precedential value are published in the official reports of court decisions: the Washington Reports 2d and the Washington Appellate Reports. An opinion in the official reports replaces
The slip opinion that begins on the next page is for a published opinion, and it has since been revised for publication in the printed official reports. The officiаl text of the court’s opinion is found in the advance sheets and the bound volumes of the official reports. Also, an electronic version (intended to mirror the language found in the official reports) of the revised opinion can be found, free of charge, at this website: https://www.lexisnexis.com/clients/wareports.
For more information about precedential (published) opinions, nonprecedential (unpublished) opinions, slip opinions, and the official reports, see https://www.courts.wa.gov/opinions and the information that is linked there.
MADSEN, C.J.—The Washington Department of Retirement Services (DRS) and the State of Washington petition for review of an order granting summary judgment to a class of public employee unions and unaffiliated employees and holding that the 2011 repeal of legislation granting future uniform cost of living adjustments (UCOLA) to the respondents’ monthly pension payments was an unconstitutional impairment of the State’s contractual obligation with its employees. We disagree because the legislature reserved its right to repeal the pension rights at issue and the original enactment of UCOLA did not impair any existing contract rights of state employees. Accordingly we reverse.
FACTS AND PROCEDURAL HISTORY
The Public Employees’ Retirement System (PERS) Plan 1 and the Teachers’ Retirement System (TRS) Plan 1 governed the state’s pre-1977 pension program for school teachers, administrators, and other
As the years progressed, pressure mounted to adjust pensions to reflect greater retiree longevity and increased inflation. Beginning in the early 1970s, the legislature enacted a series of cost of living adjustments (COLAs) that were limited to specific groups and time periods. In 1973, the legislature provided an adjustment based on a cost of living factor. This COLA stated that an adjustment “shall” be made, “provided, that the department finds, at its sole discretion” that the system assets could fund the COLA. Former
In 1995, motivated by the desire to simplify calculations, expand coverage, and streamline the administration of COLA benefits, the legislature passed a UCOLA scheme. LAWS OF 1995, ch. 345, § 1. UCOLA repealed the 1973 COLA and the purchasing power COLA, and made the age-70 COLA permanent for those already receiving it. FINAL B. REPORT ON SUBSTITUTE S.B. 5119, 54th Leg., Reg. Sess. (Wash. 1995). UCOLA also replaced the old minimum benefit COLA with a new minimum allowance of $24.22 per year of service, to be adjusted annually for cost of living in the same manner as all pensions.
UCOLA created a monthly increase amount per year of service (annual increase amount). LAWS OF 1995, ch. 345, §§ 2, 5. At the time of UCOLA’s enactment in 1995, the annual increase amount was $0.59 per year of service. Former
To prevent a perpetual obligation to increase the COLA amount each year, the legislature included a clause that reserved its right to modify or repeal the UCOLA scheme in the future and specified that it was not creating any contract rights. Former
In 2011, responding to the ongoing financial crisis and state actuary reports that Plan 1 was underfunded, the legislature exercised its reserved right and repealed UCOLA. LAWS OF 2011, ch. 362, § 1 (“The legislature now finds that changing economic conditions have alsо made necessary the amendatory provisions contained in this act.”). Because employee contribution to Plan 1 was capped and the legislature was reluctant to force employers to contribute more, UCOLA was being funded primarily with current Plan 1 assets. Plan 1 thus became underfunded and the legislature responded with repeal. Under the terms of the repeal, the annual increase amount will cease increasing by three percent each year. Instead, it will remain locked at the July 1, 2010 amount per service year.
On October 12, 2011, the Washington Education Association and a class of Plan 1 employees filed a complaint in Thurston County Superior Court challenging the 2011 repeal of UCOLA. The plaintiffs raised four claims, one of which alleged that the repeal of UCOLA was an unconstitutional impairment of the state’s contract with its employees.4 In April 2012, the plaintiffs filed a motion for summary judgment on this contract impairment claim. The trial judge granted summary judgment to the plaintiffs, reasoning that the repeal was an unconstitutional impairment. The defendants, DRS аnd the State, then filed a motion for certification under RAP 2.3(b)(4) and a notice of discretionary review in this court. The trial court certified a class that includes all Plan 1 members, retired or working, all of whom became state employees prior to October 1, 1977.5 In June 2013, this court granted the
ANALYSIS
Standard of Review
This court reviews summary judgment de novo. Retired Pub. Emps. Council of Wash. v. Charles, 148 Wn.2d 602, 612, 62 P.3d 470 (2003). This court presumes that statutes are constitutional as enacted. The challenging party, in this case the respondents, must establish that “‘there is no reasonable doubt that the statute violates the constitution.’” Pierce County v. State, 159 Wn.2d 16, 27, 148 P.3d 1002 (2006) (quoting Larson v. Seattle Popular Monorail Auth., 156 Wn.2d 752, 757, 131 P.3d 892 (2006)).
Impairment of Public Pension Contracts: The Legal Standard
Article I, section 23 of the Washington Constitution provides that “[n]o bill of attainder, ex post facto law, or law impairing the obligations of contracts shall ever be passed.” This protection echoes the parallel federal constitutional provision, which prohibits states from passing “any . . . law impairing the obligation of contracts.”
Bakenhus is considered “our leading statement on the basic legal nature of public pensions.” Leonard v. City of Seattle, 81 Wn.2d 479, 485, 503 P.2d 741 (1972). The plaintiff in Bakenhus, a police officer who retired in 1950, was entitled to a pension of $185 per month under the law existing at the time he was hired in 1925. Bakenhus, 48 Wn.2d at 696-97. An amendment to the city pension law in 1937 instituted a $125 per month maximum for pension payments, and the plaintiff sued, alleging that the amended law was an impairment of his pension contract with the city. Id. at 697. This court ruled for the plaintiff and held that pensions are “deferred compensation for services rendered” and therefore create a contract that can be modified only to ensure the continued flexibility and integrity of the system. Id. at 698, 701. Modifications that have an adverse effect on employees must be accompanied by “‘comparable new advantages.’” Id. at 702 (quoting Allen v. City of Long Beach, 45 Cal. 2d 128, 131, 287 P.2d 765 (1955)). The court noted that “[a]pproximately one third of the anticipated pension has been removed with no corresponding benеfit, and no showing by the appellants that the reduction was necessary to preserve and perfect the system, nor that it bore any reasonable relation to the
Independently of the Bakenhus line of pension cases, this court developed an analysis for impairment of other public contracts. Originating in Carlstrom v. State, 103 Wn.2d 391, 394-99, 694 P.2d 1 (1985), this test provides that legislation will unconstitutionally impair a public contract only if it substantially impairs an existing contractual relationship and is not reasonable and necessary to serve a lеgitimate public purpose. Subsequent cases have divided the test into three distinct parts: (1) whether a contractual relationship exists; (2) whether the legislation substantially impairs the contractual relationship; and (3) if there is substantial impairment, whether the impairment is reasonable and necessary to serve a legitimate public purpose. Charles, 148 Wn.2d at 624; Tyrpak v. Daniels, 124 Wn.2d 146, 152, 874 P.2d 1374 (1994).
The State argues, and we agree, that the Carlstrom public contract test applies with equal force to public pension contracts. The Carlstrom test governs the impairment of public contracts, of which pension statutes like UCOLA are one category. E.g., Wash. Fed’n, 127 Wn.2d at 561; Caritas, 123 Wn.2d at 402-03; Carlstrom, 103 Wn.2d at 394-98. Although the Bakenhus and Carlstrom lines have developed separately, the Carlstrom public contract test in reality forms thе backbone of the analysis in pension cases. We intimated this result in Charles, 148 Wn.2d at 624, where we applied the Carlstrom test to a public pension contract. We now make explicit what was implicit in Charles: when analyzing whether a law impairs public pension contracts we will apply the same three-part test governing all public contracts. Within this overarching framework, the Bakenhus requirements of flexibility, integrity, and comparable new advantages focus the Carlstrom test in the specific context of public pension rights.
Application: No Impairment of Contract
The respondents frame their argument as a challenge to the 2011 repeal of UCOLA. They contend that the original enactment of UCOLA in 1995 did not impair existing contract rights because UCOLA could have bеen left in place or been repealed in a constitutional manner. Resp’ts’ Answer to Pet’rs’ Suppl. Br. at 2-3. The impairment of employees’ contract rights, they argue, did not occur until 2011 when the legislature repealed UCOLA without complying with the dictates of Bakenhus. Id. We reject this argument.
Even assuming that the 2011 repeal legislation affected an existing contractual relationship, satisfying the first part of the Carlstrom test, the repeal legislation did not substantially impair the contractual relationship as reflected in the 1995 UCOLA statute. Indeed, the authority to repeal the UCOLA was contained in the 1995 UCOLA legislation. Merely acting upon that authority did not alter any contract that was formed by the 1995 UCOLA legislation. Moreover, the respondents’ argument is circular. Striking down the repeal legislation would reinstate the 1995 UCOLA statute, which includes a provision expressly reserving the right to repeal. The respondents’ contract rights are defined by the language of the statute creating those rights. Here, that language includes a right to amend or repeal. If the respondents’ contract rights were violated, they were violated by the enactment of UCOLA or by including a reservation of rights provision in that legislation. The 2011 repeal merely executed a provision of the established contract.
The respondents make two additional points to support their argument. First, they assert that UCOLA’s reservation language is unenforceable. Br. of Resp’ts at 30-39. Alternatively, they argue that the 1995 enactment of UCOLA impaired their contract rights by repealing the 1973 COLA without providing comparable new advantages. Resp’ts’ Answer to Pet’rs’ Suppl. Br. at 3-4. Neither of these arguments establishes an impairment of the pension contract.
Turning first to the reservation clause, no Washington court has held such a
In contrast to Jacoby, the UCOLA reservation clause existed as an express provision of the statute that created the claimed pension right. Furthermore, even the respondents recognize that Jacoby’s comments regarding the enforceability of reservation clauses were dicta. Id.; Br. of Resp’ts at 32 (“The following language, although dicta, was relied on in Navlet[ v. Port of Seattle, 164 Wn.2d 818, 194 P.3d 221 (2008)] and is applicable here.”). In Jacoby, this court ultimately held that the employee plaintiff was not eligible for a pension because the contract unambiguously limited application to employees who had been working for at least 10 years after the plan was implemented. 77 Wn.2d at 917. The court did not need to reach the reservation clause because the contract expressly excluded the plaintiff from the pension plan. Id.
The respondents also rely on Navlet. In Navlet this court did rely on Jacoby to strike a rеservation clause contained in materials accompanying a collective bargaining agreement (CBA) provision for welfare benefits. There, when the CBA expired, the employer ceased contributing to his employees’ welfare benefits trust as had been outlined in the CBA. Navlet, 164 Wn.2d at 824-27. The trust agreement and summary that accompanied the CBA reserved the right of the employer to amend or repeal the welfare benefits program and this court held such a reservation unenforceable. Id. at 848-49. However, the court recognized that the reservation clause would have been enforсeable if it had been placed “in the CBA itself” instead of in the accompanying documents. Id. at 849. Here, the reservation clause is part of the UCOLA statute which, like the CBA in Navlet, is the source of the employees’ claimed contractual right. The Navlet analysis does not support the respondents’ claim that a reservation clause cannot be given effect when it is contained in the statute creating the benefit.
Rules of statutory construction demand enforceability of the reservation clause. Plan 1 members are bound by the terms of their employment contract. See Jacoby, 77 Wn.2d at 916 (“Where a private pension plan creates a contractual obligation between employer and employee, the rights and obligations of the parties must be measured by the terms of the contract under the ordinary rules of contractual construction.”); see also Densley v. Dep’t of Ret. Sys., 162 Wn.2d 210, 219, 173 P.3d 885 (2007) (stating that “where ‘a statute is clear on its face, its meaning [should] be derived from the language of the statute alone’” (alteration in original) (quoting Kilian v. Atkinson, 147 Wn.2d 16, 50 P.3d 638 (2002)). The ordinary rules of construction link the enforceability of reservation clauses to the degree of specificity contained in the clause. See, e.g., Wash. Fed’n, 127 Wn.2d at 563 (“To be effective as a reservation of powers clаuse, the language
The nature of the UCOLA benefit also supports the enforceability of the legislature’s right to repeal this benefit. Employees do not contribute to the UCOLA and the adjustment provided is not “pay withheld to induce continued faithful service” in the same way that a basic pension plan is. Jacoby, 77 Wn.2d at 915; see also Bakenhus, 48 Wn.2d at 700 (quoting Giannettino v. McGoldrick, 295 N.Y. 208, 66 N.E.2d 57, 59 (1946)). This is particularly true of members who retired prior to UCOLA’s enactment in 1995. Whereas a basic pension plan is deferred compensation and induces long and faithful service over time, a COLA merely enhances the value of the basic pension payment by adjusting for inflation and cost of living increases. Surely the legislature can make the addition of such a bonus subject to its right to amend or repeal the program in the future. To say otherwise would strongly disincentivize the legislature from providing additional benefits beyond a basic pension. Although the UCOLA relates to the basic pension plan, it differs significantly from the deferred and compensatory basic pension that was at issue in Bakenhus.
The respondents’ alternative argument that rights created under the 1995 UCOLA constitute an impairment because UCOLA repealed the 1973 COLA statute without providing comparable new advantages also fails. As a preliminary matter, the majority of the respondents’ class is time barred from bringing this claim. It is well settled that retirees are subject to a three-year statute of limitations for actions alleging a breach of pension contracts. See, e.g., Bowles v. Dep’t of Ret. Sys., 121 Wn.2d 52, 79-80, 847 P.2d 440 (1993); Noah, 112 Wn.2d at 842-43. As the respondents recognize, this three-year clock begins to run at the time of retirement. Resp’ts’ Answer to Pet’rs’ Suppl. Br. at 8-11; see also Bowles, 121 Wn.2d at 79-80; Noah, 112 Wn.2d at 842-43. Yet 60 percent of class members have already retired and thus are time barred unless they retired fewer than three years before the time of suit. See Resp’ts’ Answer to Pet’rs’ Suppl. Br. at 7-8. Only the approximately 40 percent of the class who has not yet retired has standing to raise this argument. Though this 40 percent of employed class members is not time barred, their challenge fails on substantive grounds under the Carlstrom public contract test as informed by Bakenhus.
The first prong of the Carlstrom test considers whether a contract exists. Arguably the 1973 COLA did not create a contract because the rights it formed were illusory. Disbursement of COLA benefits under the 1973 COLA was subject to DRS’s discretionary finding that Plan 1 was adеquately funded and could support such a benefit payout. The respondents contend that the 1973 COLA provided a concrete benefit because it required DRS to consider the system’s capacity to fund a COLA each year. Yet the 1973 statute made the ultimate decision subject to DRS’s discretion, which in practice DRS rarely chose to exercise. Indeed, for the 15 years leading up to the enactment of UCOLA, DRS never once found the requisite funding to support a COLA under the 1973 Act. In statutory language and in practice, the 1973 COLA did not provide employees with any concrete pension benefits and therefore did not become part of their employment contract with the State.
Even if we agreed with the respondents that the 1973 COLA created a contract right to annual legislative consideration of the feasibility of granting a COLA, the respondents’ claim fails the second prong of the Carlstrom analysis. If a contract right exists, the second prong considers whether the challenged legislation has substantially impaired that contract right. We hold that in public pension cases, substantial impairment is measured by the implied consent
The rule announced [in Bakenhus] stands for the proposition that pension rights are contractual rights which vest at the beginning of the employmеnt relationship. The State cannot alter that contract without mutual consent. Where the change is favorable to the employee, consent will be implied. Conversely, where the change is disadvantageous, consent will be presumed not to have been given unless the change is made concurrently with an added benefit.
98 Wn.2d 677, 686, 658 P.2d 634 (1983) (citations omitted); see also Vallet v. City of Seattle, 77 Wn.2d 12, 21-22, 459 P.2d 407 (1969) (affirming that “‘an act of the legislature, making a change in pension rights, will be weighed against pre-existing rights in each individual case to determine whether it is reasonable and equitable. If the over-all result is reasonable and equitable, the employees (prospeсtive pensioners) will be presumed to have acquiesced in the modifications.’” (quoting Dailey v. City of Seattle, 54 Wn.2d 733, 738, 344 P.2d 718 (1959)); Dailey, 54 Wn.2d at 739, 740-42 (reasoning that “the acquiescence of the employees concerned is to be presumed where some advantages have been sacrificed to gain compensating or greater benefits”). All this is to say that a modification of a pension contract will not substantially impair an existing contract if the overall result of the change is favorable to employees. Whether an alteration is favorable to employees is a fact-specific question that must be measured by the totality of the circumstances.
Applying this analysis to the 1995 enactment of UCOLA, it is clear that the Plan 1 employees received comparable new advantages under the 1995 UCOLA program. At the time class members began working prior to 1977, their employment contract did not include any automatic COLA adjustment. Employees who started after 1973 obtained the possibility of an ad hoc COLA, but the 1973 COLA was different in kind from the UCOLA because it was explicitly discretionary and was contingent on the availability of adequate funding. In both statutory language and fact, the UCOLA system of annual COLA adjustments represented a substantial improvemеnt over the 1973 COLA. Notwithstanding its reservation clause, UCOLA provided a guaranteed right to an annual COLA of increasing amounts for as long as the program remained in effect. In contrast, the 1973 COLA did not provide any certain COLA benefits, but merely assured employees that the DRS would consider whether a COLA was practicable based on current funding levels. DRS rarely found adequate funding and granted a COLA, whereas retired Plan 1 members received yearly COLAs of steadily increasing amounts throughout the years that UCOLA was in effect. Although the UCOLA statute reserved the legislature’s right to change or terminate the program, such reservation clauses аre enforceable and even the creation of an undefined automated COLA system constitutes an added favorable benefit to the existing Plan 1 pension rights. When the legislature implemented the UCOLA scheme in 1995, it created a favorable modification to the Plan 1 employees’ pension contract. We reject the respondents’ argument that the 1995 UCOLA substantially impaired class members’ rights by eliminating the 1973 COLA.
CONCLUSION
We hold that the Carlstrom three-prong test for impairment of public contracts applies to public pension contract impairment. However, the Bakenhus line of cases remains relevant and strongly informs our aрplication of the Carlstrom test in public pension cases. In this case, neither the 1995 enactment of UCOLA nor its 2011 repeal
No. 88546-0
Madsen, C.J.
WE CONCUR:
Stephens, J.
Wiggins, J.
Fairhurst, J.
González, J.
Siddoway, J.P.T.