Baltimore Teachers Union v. Mayor of Baltimore

6 F.3d 1012

• Court: Court of Appeals for the Fourth Circuit
• Decided: September 2, 1993
• Docket: Nos. 92-2234, 92-2237 and 92-2238
• Status: Published

Opinions

OPINION

LUTTIG, Circuit Judge:

In response to budgetary shortfalls, Baltimore City implemented a plan under which it ultimately reduced the annual salaries of its employees by approximately 1%, through deductions from five of their semi-monthly p'ay-checks. Its teachers and police, through their certified collective bargaining units, brought suit alleging that the salary reductions constituted an impermissible impairment of their contracts with the City. The district court entered judgment in their favor, and we now reverse.

I.

The facts essential to the resolution of this case are simple and not in dispute. Baltimore has what is commonly known as an “executive budget system,” the chief executor of which is the City’s Board of Estimates. See generally City of Baltimore v. American Fed’n of State, County & Mun. Employees, 281 Md. 463, 379 A.2d 1031, 1034-36 (1977). Pursuant to the Municipal Employee Relations Ordinance (“MERO”), the police negotiate memoranda of understanding embodying the terms of their employment with the City, which are approved by the Board of Estimates and collected with other budgetary obligations in an Ordinance of Estimates. The Ordinance of Estimates is then enacted into law by the City Council. The process for the City’s teachers, though not pursuant to MERO, is apparently similar. The Board of School Commissioners negotiates the terms of employment, which are then approved by the Board of Estimates, included in the Ordinance of Estimates, and enacted into law by the City Council. It is undisputed that these procedures were followed for Fiscal Year 1992, the period relevant to this litigation.

As of October 1991, Baltimore had lost a total of approximately $24.2 million in state aid, $4.78 million of which was cut pursuant to special authority granted the Governor by the General Assembly meeting in special session. Baltimore responded to this round of cuts with a variety of measures, such as layoffs, elimination of positions, and early retirements. Having failed to reverse the tide of the State’s financial fortunes, the Governor announced in December 1991 a new round of proposed cuts in state aid to Baltimore, equal to approximately $13.3 million, and in response Baltimore implemented its so-called furlough plan. Under the plan, full-time city employees, except for firefighters, who enjoy certain privileges, lost the annual equivalent of 2.5 days of pay, or .95% of their gross annual salary, and Baltimore saved approximately $2 million, which it does not intend to refund. These salary reductions were less than those originally contemplated under the plan, because it was discontinued midstream after the General Assembly approved only $4.68 million of the cuts proposed by the Governor for Baltimore City.

Seeking restitution, the teachers and police brought suit, charging that their salary reductions violated the Contract Clause, U.S. Const, art. I, § 10, cl. 1 (“No State shall ... pass any ... Law impairing the Obligation of Contracts.... ”). The district court ruled in their favor, 801 F.Supp. 1506, and this appeal followed.

II.

Though the Contract Clause is phrased in absolute terms, the Supreme Court does not interpret the Clause absolutely to prohibit the impairment of either government or private contracts. See United States Trust Co. v. New Jersey, 431 U.S. 1, 21, 97 S.Ct. 1505, 1517, 52 L.Ed.2d 92 (1977) (“Although the Contract Clause appears literally to proscribe ‘any’ impairment, this Court observed in Blaisdell that ‘the prohibition is not an absolute one and is not to be read with literal exactness like a mathematical formula.’ ” (quoting Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 428, 54 S.Ct. 231, 236, 78 L.Ed. 413 (1934))).¹ Rather, it has formulated essentially a three-part analysis for harmonizing the command of the Clause with the “necessarily reserved” sovereign power of the states to provide for the welfare of their citizens. Id.²

As a threshold matter, it must be determined whether there has been impairment of a contract. See, e.g., id. 431 U.S. at 17, 97 S.Ct. at 1515 (“[A]s a preliminary matter, appellant’s claim requires a determination that the [law] has the effect of impairing a contractual obligation.”). Second, it must be determined “whether the state law has, in fact, operated as a substantial impairment of a contractual relationship.” Spannaus, 438 U.S. at 244, 98 S.Ct. at 2722 (emphasis added); see also Bannum, Inc. v. Town of Ash-land, 922 F.2d 197, 202 (4th Cir.1990) (legislation must constitute “a severe impairment of the [contractual] right”). Finally, assuming there has been a substantial impairment of contract, it must be determined whether that impairment is nonetheless permissible as a legitimate exercise of the state’s sovereign powers, an inquiry that differs subtly depending upon whether the contract impaired is a private or, as here, a public one. Analyzing Baltimore’s action within this framework, we agree with the district court that the City substantially impaired an extant contract with its teachers and police. We conclude, however, affording the requisite degree of deference to the City’s legislature, that the impairment was in exercise of the City’s legitimate powers and thus permissible under the Contract Clause.

A.

1.

We have little trouble concluding, as did the district court, see J.A. at 344-45, that Baltimore intended to and did enter into contractual relationships with its teachers and police, at least upon enactment into law of the Ordinance of Estimates. Cf. United States Trust, 431 U.S. at 17 n. 14, 97 S.Ct. at 1516 n. 14 (“In general, a statute is itself treated as a contract when the language and circumstances evince a legislative intent to create private rights of a contractual nature enforceable against the State.”); American Fed’n, 379 A.2d at 1035. Upon enactment of the Ordinance, the City Council formally ratified the essential agreement between the City and its employees embodied in the memoranda of understanding and authorized funding for the City’s obligations under those memoranda.

There was, we believe, also an impairment of those contracts. The teachers and police indisputably received less in salary than they were entitled to receive under the terms of their contracts. Only if the employees’ salaries were subject to unilateral adjustment by the City under the terms of the contract could it possibly be concluded otherwise. In this regard, the City argues that any contract that existed was expressly subject to the Baltimore City Charter which, it contends, permitted the reductions. Appellants’ Br. at 17. We reject this contention.

Given the value ascribed to contracts in our society, and the Constitution’s explicit proscription on the state’s impairment of contracts, we would not hold, absent the clearest evidence, that the City intended to confer upon the Board of Estimates even the power unilaterally to modify the City’s contracts. We do not read the City Charter as clearly evidencing such an intent. As the City notes, the memoranda of understanding were made explicitly subject to the provisions of the City Charter, see Baltimore, Md., Code art. I, §§ 119, 123, and, in any event, contracts generally are understood to incorporate existing law, such as the Charter, see Blaisdell, 290 U.S. at 435-36, 54 S.Ct. at 239. But section 2(g) of the Charter,³ which the City argues most clearly authorizes the modification of contracts, only authorizes the Board of Estimates to effect “reductions ... in appropriations.” This power does not necessarily subsume the power to modify contracts,⁴ and therefore does not clearly evidence an intention to authorize such modifications.⁵

2.

Whether the impairment of the employees’ contracts was substantial is a slightly more difficult question, but one that we believe also must be answered in the affirmative. A respect for the vital role of contract generally informs the “substantiality” inquiry:

The severity of an impairment of contractual obligations can be measured 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. Once arranged, those rights and obligations are binding under the law, and the parties are entitled to rely on them.

Spannaus, 438 U.S. at 245, 98 S.Ct. at 2723. The Supreme Court, however, has provided little specific guidance as to what constitutes a “substantial” contract impairment. It is clear that not all impairments are substantial for Contract Clause purposes. “Technical” impairments, for example, do not necessarily rise to the level of constitutional violations. See id. (“Minimal alteration of contractual obligations may end the inquiry at its first stage.”); see also United States Trust, 431 U.S. at 21, 97 S.Ct. at 1517 (“A finding that there has been a technical impairment is merely a preliminary step in resolving the more difficult question whether that impairment is permitted under the Constitution.”). By the same token, there is plainly no requirement of total repudiation. See Energy Reserves, 459 U.S. at 411, 103 S.Ct. at 704 (“Total destruction of contractual expectations is not necessary for a finding of substantial impairment.”); United States Trust, 431 U.S. at 26, 97 S.Ct. at 1519. The ground between these spectral ends, though, has yet to be charted with any precision.

While the Court has not refined the analysis for assessing the substantiality of an impairment, it has appeared to assume that an impairment is substantial at least where the right abridged was one that induced the parties to contract in the first place, see El Paso, 379 U.S. at 514, 85 S.Ct. at 587 (“We do not believe that it can seriously be contended that the buyer was substantially induced to enter into these contracts on the basis of a defeasible right to reinstatement....”); Spannaus, 438 U.S. at 243 n. 14, 98 S.Ct. at 2722 n. 14 (noting that El Paso Court concluded that the “ ‘measure taken ... was a mild one indeed’ ” because it did not affect term that induced contract (quoting 379 U.S. at 616, 85 S.Ct. at 525)); see also id. at 245 & n. 17, 98 S.Ct. at 2723 & n. 17 (citing to n. 14 discussion of El Paso’s inducement inquiry in support of statement that “minimal alteration” of contract obligations may not violate Clause), or where the impaired right was one on which there had been reasonable and especial reliance,⁶ see, e.g., Spannaus, 438 U.S. at 246, 98 S.Ct. at 2723 (noting that state law changed obligations “in an area where the element of reliance was vital”); id. (“[The company] relied heavily, and reasonably, on this legitimate contractual expecta-tion_”); id. (“Thus, a basic term of the pension contract — one on which the company had relied for 10 years — was substantially modified.”).⁷

The Court, thus, has refused to invalidate a state’s statute of repose, on the ground that the reinstatement right affected by the statute “was not the central undertaking of the seller nor the primary consideration for the buyer’s undertaking.” See El Paso, 379 U.S. at 514, 85 S.Ct. at 586. Similarly, because the affected party could not have relied upon receipt of such benefits, the Court has “regarded the elimination of unforeseen windfall benefits as a reasonable basis for sustaining changes in statutory deficiency judgment procedures.” United States Trust, 431 U.S. at 31 n. 30, 97 S.Ct. at 1522 n. 30 (citing cases). It sustained in Richmond Mortgage & Loan Corp. v. Wachovia Bank & Trust Co., 300 U.S. 124, 130, 57 S.Ct. 338, 340, 81 L.Ed. 552 (1937), for example, a state law that “recognize[d] the obligations of [the mortgagee’s] contract and his right to its full enforcement but limit[ed] that right so as to prevent his obtaining more than his due.” And the Court has approved modifications of contractual provisions on which there could have been no reliance, either because the parties explicitly provided or because they should have recognized, that the particular rights were necessarily subject to legislative impairment. See supra note 6 (citing Energy Reserves and Veins).

Based upon these authorities, we are confident that, at the very least, where the contract right or obligation impaired was one that induced the parties to enter into the contract and upon the continued existence of which they have especially relied, the impairment must be considered “substantial” for purposes of the Contract Clause.

In the employment context, there likely is no right both more central to the contract’s inducement and on the existence of which the parties more especially rely, than the right to compensation at the contractually specified level. Accordingly, we believe that the salary reductions at issue constituted a substantial impairment of the employees’ contract with the City of Baltimore.⁸

B.

This does not end the analysis, however. “The Contract Clause is not an absolute bar to subsequent modification of a State’s own financial obligations.” United States Trust, 431 U.S. at 25, 97 S.Ct. at 1519. We must yet “attempt to reconcile the strictures of the Contract Clause with the ‘essential attributes of sovereign power’ necessarily reserved by the States to safeguard the welfare of their citizens.” Id. at 21, 97 S.Ct. at 1517 (quoting Blaisdell, 290 U.S. at 435, 54 S.Ct. at 239) (citation omitted); see also id. 431 U.S. at 23, 97 S.Ct. at 1518 (“In short, the Contract Clause does not require a State to adhere to a contract that surrenders an essential attribute of its sovereignty.”); El Paso, 379 U.S. at 509, 85 S.Ct. at 584 (“The reserved power cannot be construed so as to destroy the limitation, nor is the limitation to be construed to destroy the reserved power in its essential aspects.”); cf. United States Trust, 431 U.S. at 23 n. 20, 97 S.Ct. at 1518 n. 20 (“[A] state is without power to enter into binding contracts not to exercise its police power in the future.”). As where a government modifies a wholly private contract, a government modification of its own financial obligations must be “reasonable and necessary to serve an important public purpose.” Id. at 25, 97 S.Ct. at 1519; see also Energy Reserves, 459 U.S. at 411, 103 S.Ct. at 704 (“If the state regulation constitutes a substantial impairment, the State, in justification, must have a significant and legitimate public purpose behind the regulation....”); Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 505, 107 S.Ct. 1232, 1252, 94 L.Ed.2d 472 (1987) (“significant and legitimate public purpose”); see also Energy Reserves, 459 U.S. at 412, 103 S.Ct. at 705 (“The requirement of a legitimate public purpose guarantees that the State is exercising its police power, rather than providing a benefit to special interests.”). Neither the teachers nor the police disputes that ensuring the financial integrity of the City is a significant public purpose. Both argue, however, that the furlough plan was neither reasonable nor necessary to achieve this purpose.

When a state acts to impair private contracts, “courts properly defer to legislated judgments as to the necessity and reasonableness of a particular measure.” United States Trust, 431 U.S. at 23, 97 S.Ct. at 1518. Public contracts stand on a somewhat different footing. Because “the State’s self-interest is at stake,” id. at 26, 97 S.Ct. at 1519, these contracts occupy what the Court has termed a “special status” for Contract Clause purposes, id., and must be more scrupulously examined, see, e.g., Spannaus, 438 U.S. at 244 & n. 15, 98 S.Ct. at 2722 & n. 15.⁹ Unlike with respect to state impairments of private contracts, “complete deference” to legislative assessments of the reasonableness and necessity for modifying public contracts is not appropriate. United States Trust, 431 U.S. at 26, 97 S.Ct. at 1519 (emphasis added). While complete deference is inappropriate, however, at least some deference to legislative policy decisions to modify these contracts in the public interest must be accorded.¹⁰ See Continental Ill. Nat’l Bank & Trust Co. v. Washington, 696 F.2d 692, 701 (9th Cir.) (“Because the State is a contracting party, we give less deference to its claims of justification for impairment.” (emphasis added, citing United States Trust, 431 U.S. at 25-26, 97 S.Ct. at 1519)), appeal dismissed, 460 U.S. 1077, 103 S.Ct. 1762, 76 L.Ed.2d 338 (1983); Local 589, Amalgamated Transit Union v. Massachusetts, 666 F.2d 618, 643 (1st Cir.1981) (Even in cases involving public contracts, “where economic or social legislation is at issue, some deference to the legislature’s judgment is surely called for.”), cert. denied, 457 U.S. 1117, 102 S.Ct. 2928, 73 L.Ed.2d 1329 (1982). But cf. Nevada Employees Ass’n, Inc. v. Keating, 903 F.2d 1223, 1226 (9th Cir.) (Its decisions “do not indicate that the Court would defer to state legislatures when public as opposed to private contracts are at issue.”), cert. denied, 498 U.S. 999, 111 S.Ct. 558, 112 L.Ed.2d 565 (1990). The district court afforded essentially no deference whatsoever to Baltimore’s determinations of the reasonableness and necessity of the salary reductions, see J.A. at 351 (“Alternatives always exist to imposing the costs of budgetary shortfalls on a class of contracting parties such as city employees.”), and it is at least in part because of this failure that it erred.

It is not enough to reason, as did the district court, that “[t]he City could have shifted the burden from another governmental program,” or that “it could have raised taxes.” Id. (emphases added). But see Surrogates, 940 F.2d at 773. Were these the proper criteria, no impairment of a governmental contract could ever survive constitutional scrutiny, for these courses are always open, no matter how unwise they may be. Our task is rather to ensure through the “necessity and reasonableness” inquiry that states neither “consider impairing the obligations of [their] own contracts on a par with other policy alternatives” or “impose a drastic impairment when an evident and more moderate course would serve its purposes equally well,” United States Trust, 431 U.S. at 30-31, 97 S.Ct. at 1522, nor act unreasonably “in light of the surrounding circumstances,” id. at 31, 97 S.Ct. at 1522.

We are satisfied that Baltimore City did neither. Required by law to balance its budget, the City took what we believe to be needed and measured steps to absorb extraordinary reductions in revenue.¹¹ By October 1991, facing a deficit of some $450 million, the State of Maryland had dramatically decreased funding to local governments for Fiscal Year 1992, with the net effect that Baltimore lost approximately $24.2 million in state aid. In response to these cuts, the City, which was already suffering from the sluggish economy and poor financial management, not only abandoned previously negotiated pay raises but also effected other nonsa-lary cost savings. Because personnel costs constitute such a large percentage of its expenditures (for example, 91.8% of the Police Department budget and 82.5% of the Public School budget), however, Baltimore was also forced to resort to such measures as layoffs, job abolishments, and early retirements.

In December 1991, nearly midway through the fiscal year, the State proposed an eleventh-hour, second round of cuts in state aid to the City, totaling approximately $13.3 million. Only then, and only in order to maintain its budget in balance and avoid further layoffs, did the City resort to the furlough plan at issue here.¹² The City’s obvious reluctance to resort to the plan and its decision to do so only when it concluded that it had no better alternative belies the “political expediency” suspected in Surrogates, 940 F.2d at 773, and confirms that the City did not consider salary reductions on a par with other policy choices, see United States Trust, 431 U.S. at 29-31, 97 S.Ct. at 1521-22.

Nor on such facts as these can we conclude that the City chose a drastic impairment over an equally acceptable, more moderate course. First, the amount of the reduction was no greater than that necessary to meet the anticipated shortfall. See United States Trust, 431 U.S. at 29-30, 97 S.Ct. at 1521 (criticizing “total repeal” of bond covenant when “a less drastic modification would have permitted the contemplated plan without entirely removing the covenant’s limitations”). Second, the city discontinued the plan immediately upon recognition that the budgetary shortfall would not be so great as anticipated. See Energy Reserves, 459 U.S. at 418, 103 S.Ct. at 708 (noting approvingly that “the Act is a temporary measure that expires when federal price regulation of certain categories of gas terminates.”). Finally, the plan did not alter pay-dependent benefits, overtime pay, hourly rates of pay, or the orientation of pay scales. See United States Trust, 431 U.S. at 27, 97 S.Ct. at 1520 (“The extent of impairment is certainly a relevant factor in determining its reasonableness.”). Indeed, the plan was less drastic than at least one alternative, additional layoffs, which could have been more detrimental to appellees. See Faitoute Iron & Steel Co. v. City of Asbury Park, 316 U.S. 502, 516, 62 S.Ct. 1129, 1136, 86 L.Ed. 1629 (1942) (upholding law affecting municipal bond terms in part because it ben-efitted the bond holders); see also Reply Br. at 13 (“Appellees advance no basis for disputing the fact that the pay reduction was an alternative, presumably a preferred alternative, to layoffs.”). In short, the City clearly sought to tailor the plan as narrowly as possible to meet its unforeseen shortfalls.

We also conclude that the salary reductions were reasonable under the circumstances. In addition to its careful tailoring, the furlough plan possessed, not insignificantly, each of the attributes identified in Spannaus as present in various state laws that had impaired private contracts but survived Contract Clause challenge. First, the plan was designed to “deal with a broad, generalized economic or social problem.” 438 U.S. at 250, 98 S.Ct. at 2725 (citing Blaisdell, 290 U.S. at 445, 54 S.Ct. at 242); see also Exxon, 462 U.S. at 191, 103 S.Ct. at 2306 (noting approvingly that the statute “did not prescribe a rule limited in effect ..., but instead imposed a generally applicable rule of conduct designed to advance ‘a broad societal interest’” (quoting Spannaus, 438 U.S. at 249, 98 S.Ct. at 2724)); id. 462 U.S. at 192, 103 S.Ct. at 2306 (“main effect” of Act was “shielding consumers”).¹³ Indeed, according to the City, prior to implementation of the furlough plan, “[i]t was approaching the point where it [had] to begin cutting basic services and initiating the breakdown of government.” Appellants’ Br. at 21.

Similarly, unlike the special interest character of the legislation at issue in Spannaus, Baltimore’s plan did not narrowly target specific classes of employees; it extended to all City employees. See Exxon, 462 U.S. at 176, 103 S.Ct. at 2296 (“The prohibition applied to all oil and gas producers....”); id. 462 U.S. at 192, 103 S.Ct. at 2306 (“sharply distinguish[ing]” United States Trust and Span-naus because the measures at issue there imposed no “generally applicable rule of conduct”); Energy Reserves, 459 U.S. at 412 n. 13, 103 S.Ct. at 705 n. 13 (“The pension statute [in Spannaus ] had a very narrow focus: it was aimed at specific employers.”); Spannaus, 438 U.S. at 248, 98 S.Ct. at 2724.

Third, the plan affected reliance interests not wholly unlike those of private entities in regulated industries, which contract subject to future, additional regulation. See, e.g., Energy Reserves, 459 U.S. at 416, 103 S.Ct. at 707; Spannaus, 438 U.S. at 250, 98 S.Ct. at 2725 (law affected “an area already subject to state regulation” (citing Veix, 310 U.S. at 38, 60 S.Ct. at 794)); see also Exxon, 462 U.S. at 194 n. 14, 103 S.Ct. at 2307 n. 14 (“Our conclusion is buttressed by the fact that appellants operate in industries that have been subject to heavy regulation.”). Public employees — federal or state — by definition serve the public and their expectations are necessarily defined, at least in part, by the public interest. It should not be wholly unexpected, therefore, that these public servants might well be called upon to sacrifice first when the public interest demands sacrifice.

Finally, the plan “effected] simply a temporary alteration of the contractual relationships of those within its coverage.” Spannaus, 438 U.S. at 250, 98 S.Ct. at 2725 (citing United States Trust, 431 U.S. at 22, 97 S.Ct. at 1517); United States Trust, 431 U.S. at 22 n. 19, 97 S.Ct. at 1518 n. 19 (“limited duration” of impairment is factor in reasonableness determination). The City, as noted, immediately discontinued the plan at the first opportunity and correctly does not suggest that it would be free to employ salary reductions as a common budgetary tool in the future.

The authority of the states to impair contracts, to be sure, must be constrained- in some meaningful way. The Contract Clause, however, does not require the courts — even where public contracts have been impaired— to sit as superlegislatures, determining, for example, whether it would have been more appropriate instead for Baltimore to close its schools for a week, an option actually considered but rejected, or to reduce funding to the arts, as appellees argue should have been done. Not only are we ill-equipped even to consider the evidence that would be relevant to such conflicting policy alternatives; we have no objective standards against which to assess the merit of the multitude of alternatives. While the Court today presumably would not accept in the public contract context the absoluteness of Justice Frankfurter’s response to a similar request in a private contract context that the Court reject a governor’s and legislature’s determination that the state’s public welfare required further suspension of mortgage foreclosures (or at least not the implication of his response), his essential point is relevant in both contexts: “Merely to enumerate the elements that have to be considered [in determining whether the public welfare decision was reasonable] shows that the place for determining then-weight and their significance is the legislature not the judiciary.” East New York Sav. Bank v. Hahn, 326 U.S. 230, 234, 66 S.Ct. 69, 71, 90 L.Ed. 34 (1945).

In light of the magnitude and timing of the proposed cuts in state funding that prompted the City’s salary reductions, the undisputed legitimacy of the City’s need to balance its budget, the City’s concerted efforts to exhaust numerous alternative courses of cost reduction before resorting to the challenged reductions, the circumscribed nature of the furlough plan, and the City’s immediate abandonment of the reductions at the first opportunity, we believe — according the legislature some deference but without accepting its assertions uncritically — that Baltimore’s plan was, as it must be, “upon reasonable conditions and of a character appropriate to the public purpose justifying its adoption.” United States Trust, 431 U.S. at 22, 97 S.Ct. at 1518. Accordingly, we conclude that the City’s modification of its employees’ contracts was an impairment permitted by article 1, section 10.¹⁴

CONCLUSION

For the reasons set forth above, the judgment of the district court is reversed, and the case is remanded for further proceedings consistent herewith.

REVERSED AND REMANDED.

1 . See also Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 240, 98 S.Ct. 2716, 2720, 57 L.Ed.2d 727 (1978) ("The language of the Contract Clause appears unambiguously absolute .... The Clause is not, however, the Draconian provision that its words might seem to imply”).

Justice Black, in dissent in City of El Paso v. Simmons, 379 U.S. 497, 517, 85 S.Ct. 577, 588, 13 L.Ed.2d 446 (1965), characterized the jurisprudence that resulted from the Court’s refusal to adhere to the language of the Clause as a "balancing away [of] the plain guarantee of” the Contract Clause, a characterization that was disputed by the Court in United States Trust, 431 U.S. at 29, 97 S.Ct. at 1521. But see Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 410, 103 S.Ct. 697, 703, 74 L.Ed.2d 569 (1983) (In Blaisdell, "[t]he Court balanced the language of the Contract Clause against the State's interest in exercising its police power, and concluded that the statute was justified.”).

2 . The Court has described the police power as "an exercise of the sovereign right of the Government to protect the lives, health, morals, comfort and general welfare of the people, [which] is paramount to any rights under contracts between individuals.” Spannaus, 438 U.S. at 241, 98 S.Ct. at 2721.

3 . Baltimore, Md., Charter art. VI, § 2(g) provides that "[i]n case of any such deficiency [arising from a failure to realize sufficient income from all sources to meet the amounts provided in the Ordinance of Estimates] the Board of Estimates shall effect reductions ... in appropriations. ...”

4 . It is unclear whether the events here even triggered applicability of section 2(g). That section authorizes reductions in appropriations only in the event of a "deficiency.” At the time the furlough plan was adopted in January, however, the Maryland General Assembly had yet to authorize the Governor to effect the anticipated cuts in funding to the City, an event which did not occur for several months — and even then in amounts different from those originally contemplated.

Even assuming that section 2(g) was applicable, it is far from clear that the furlough plan constituted a reduction in "appropriations” as contemplated in section 2(g). The record reflects that the Board of Estimates implemented the furlough plan merely by approving the recommendations made to it in a January 15, 1992, letter from Edward Gallagher, Chief of the Bureau of the Budget and Management Research Division of the Baltimore Department of Finance. See J.A. at 35; see also Appellants' Br. at 13 ("The pay reduction plan was put into effect immediately after the Board of Estimates approved it on January 16, 1992.”). That letter makes no mention of section 2(g) or, for example, of a reduction in appropriations to any particular city program. Indeed, it makes no mention of any reduction in "appropriations” at all. Rather, the letter refers only to an "across-the-board reduction in payroll costs” which would result in "financial savings.” Id. Moreover, terminating the furlough plan after only one-half of the approved payroll reduction had been realized required no further action by the Board of Estimates, at least in the opinion of the Mayor, who unilaterally directed the Department of Finance to cease the payroll deductions. Id. at 191. These somewhat truncated procedures, especially given that the City profferred no evidence of an actual appropriation reduction and does not refer to any such evidence in this court, belie the suggestion that an appropriation reduction ever occurred.

5 .The concurrence would hold that the City, through the Neall Amendment, see Budget Reconciliation Act for Fiscal Year 1992 § 9(a), was authorized unilaterally to contravene the terms of its contracts with the police unions and thus that there was no impairment of their contracts. That amendment provides in relevant part that the City "may take any action necessary, including any action to reduce a previously approved appropriation, to prudently manage its fiscal affairs and to meet its obligations under [the Budget Reconciliation Act for Fiscal Year 1992].” If the Neall Amendment were read to authorize any contravention of contractual terms, as the concurrence would read it, it is doubtful that there ever existed (or ever could exist) a contract between the City and its employees, because there would have been a failure of mutual obligation. More importantly, even assuming such a failure were not fatal to contract formation, the Amendment, so read, would almost certainly violate the Contract Clause itself.

6 . The Court has long regarded the "contemporaneous state law pertaining to [contract] interpretation and enforcement” as effectively incorporated into contracts, even if the parties have not expressly incorporated it. See, e.g., United States Trust, 431 U.S. at 19 n. 17, 97 S.Ct. at 1516 n. 17.

7 . On occasions, the Court has inquired whether the impairment altered the parties' "legitimate expectations.” United States Trust, 431 U.S. at 20 n. 17, 97 S.Ct. at 1516 n. 17, see also Spannaus, 438 U.S. at 247, 98 S.Ct. at 2723 (noting absence of evidence that the disruption of "contractual expectations” was necessary). It is unclear whether the Court regards this inquiry as different from its inquiry into whether the parties actually relied upon the existence of the contractual right impaired. Spannaus’ primary emphasis on reliance suggests that the Court's general reference to contract expectations was merely a shorthand for reliance. To the extent that actual reliance and expectations are not intended to be the same, however, the inquiry into expectations is reminiscent of that undertaken "[d]uring the early years when the Contract Clause was regarded as an absolute bar to any impairment,” United States Trust, 431 U.S. at 20 n. 17, 97 S.Ct. at 1516 n. 17. While such an inquiry would have been relevant then (as now) on the question of whether there has been an impairment at all, see Energy Reserves, 459 U.S. at 416, 103 S.Ct. at 707 (Court found no impairment where "[i]n short, ERG’s reasonable expectations have not been impaired by the Kansas Act.”); Veix v. Sixth Ward Bldg. & Loan Ass’n, 310 U.S. 32, 40, 60 S.Ct. 792, 795, 84 L.Ed. 1061 (1940), it would appear to be of little probative value in determining whether a particular impairment is substantial.

8 . To the extent that the magnitude of the ensuing economic loss from an impaired contract (as opposed to the nature of the right impaired) is relevant to the question of the substantiality of the impairment, we reject the City's contention that an annual salary reduction of .95% is insubstantial. Based upon an annual salary of $25,-000, this amount could represent a substantial portion of a monthly mortgage or rental payment, or weeks of food. Indeed, because individuals plan their lives based upon their salaries, we would be reluctant to hold that any decrease in an annual salary beyond one that could fairly be termed de minimis could be considered insubstantial. See, e.g., Association of Surrogates v. New York, 940 F.2d 766, 772 (2d Cir.1991) (A 10% reduction in salary over 20 weeks prompted court to remark that "[t]he affected employees have surely relied on full paychecks to pay for such essentials as food and housing.”), cert. denied, - U.S. -, 112 S.Ct. 936, 117 L.Ed.2d 107 (1992) ("Surrogates ”); Association of Surrogates v. New York, 79 N.Y.2d 39, 580 N.Y.S.2d 153, 156, 588 N.E.2d 51, 54 (1992) (10% reduction in salary over 10 weeks "not an insubstantial impairment to one confronted with monthly debt payments and daily expenses for food and the other necessities of life”); cf. Sniadach v. Family Fin. Corp., 395 U.S. 337, 342 n. 9, 89 S.Ct. 1820, 1823 n. 9, 23 L.Ed.2d 349 (1969) ("For a poor man to lose part of his salary often means his family will go without the essentials.” (internal quotations omitted)).

9 . The Court consistently has reaffirmed that “impairments of a State's own contracts would face more stringent examination under the Contract Clause than would laws regulating contractual relationships between private parties.” Spannaus, 438 U.S. at 244 n. 15, 98 S.Ct. at 2722 n. 15 (citing United States Trust, 431 U.S. at 22-23, 97 S.Ct. at 1517-18); Exxon Corp. v. Eagerton, 462 U.S. 176, 192 n. 13, 103 S.Ct. at 2306 n. 13 (1983) ("The statutes under review in United States Trust Co. also implicated the special concerns associated with a State’s impairment of its own contractual obligations.”).

10 . The Court has never expressly stated that any deference is owed legislative judgments in the context of public contract impairment. However, the most reasonable inference one gains from comparing its characterization in United States Trust of the deference due legislative judgments in the private contract context, see 431 U.S. at 22-23, 97 S.Ct. at 1517-18 (courts properly defer to such judgments), with that due such judgments in the public contract context, id. at 25-26, 97 S.Ct. at 1519 ("complete deference ... is not appropriate”), is that some degree of deference is appropriate even where a state acts to impair its own contracts.

Indeed, although the Court has never specified what it intends by the requirement of a more searching examination, it appears to mean by this only that the legislature's asserted justifications for the impairment shall not be given the complete deference that they otherwise would enjoy. See, e.g., Energy Reserves, 459 U.S. at 413 n. 14, 103 S.Ct. at 705 n. 14 (stating, after quoting United States Trust that complete deference is not required in public contract impairment context, that “stricter standard” of United States Trust does not apply because state has not altered its own contractual obligations).

11 . The public purpose justifying an impairment of contract need not be "an emergency or temporary situation," although the existence of an emergency is of course relevant. Energy Reserves, 459 U.S. at 412, 103 S.Ct. at 705; see also Spannaus, 438 U.S. at 249 n. 24, 98 S.Ct. at 2725 n. 24 ("This is not to suggest that only an emergency of great magnitude can constitutionally justify a state law impairing the obligation of contracts.”).

12 . The salary reduction was but one of a number of the measures taken by the City. Additional features of its plan included "the use of the Fiscal 1991 General Fund balance; interest cost savings due to a delay in going to the bond market; rent from the Orioles, and anticipated proceeds from the sale of City property.” J.A. at 35.

13 . Whether the changed circumstances that prompted an impairment were changes in degree or in kind is relevant to whether the impairment was reasonable. See, e.g., United States Trust, 431 U.S. at 31-32, 97 S.Ct. at 1522. To the extent the City was aware of its precarious financial condition and of possible reductions in state aid when it enacted its budget, however, we believe that the magnitude of the reductions in state aid rendered the budgetary shortfall that gave rise to the salary reductions tantamount to a difference in kind from one the City might otherwise have anticipated.

14 . We remand this case to the district court for consideration of several issues it mistakenly believed the parties had abandoned. See J.A. at 342 n. 3 ("Several issues raised in the initial cross motions for summary judgment appear to have been abandoned.”); Appellants' Br. at 2 n. 1 ("The parties have agreed that the Plaintiffs did not abandon any of their claims...."); see also Singleton v. Wulff, 428 U.S. 106, 120, 96 S.Ct. 2868, 2877, 49 L.Ed.2d 826 (1976) ("It is the general rule, of course, that a federal appellate court does not consider an issue not passed upon below.”). Our disposition of this case renders moot, however, the State of Maryland's appeal from the district court's denial of its motion for leave to intervene, and accordingly we decline to review that ruling.