National Education v. Retirement Board

• Court: Court of Appeals for the First Circuit
• Decided: March 25, 1999
• Docket: 98-1763
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 98-1763

No. 98-1782



           NATIONAL EDUCATION ASSOCIATION-RHODE ISLAND,

            BY ITS SECRETARY, TIA SCIGULINSKY, ET AL.,



             Plaintiffs, Appellees/Cross-Appellants,



                                v.



               RETIREMENT BOARD OF THE RHODE ISLAND

              EMPLOYEES' RETIREMENT SYSTEM, ET AL.,



             Defendants, Appellants/Cross-Appellees.

                            __________



                       RICHARD R. DeORSEY,

                                 

                      Plaintiff, Appellant.


APPEALS FROM THE UNITED STATES DISTRICT COURT



                 FOR THE DISTRICT OF RHODE ISLAND



          [Hon. Ronald R. Lagueux, U.S. District Judge]


Before



                     Boudin, Circuit Judge,

                                

                 Aldrich, Senior Circuit Judge,

                                

and Shadur, Senior District Judge.


Joan McPhee and Neil F.X. Kelly, Special Assistant Attorney

General, with whom John C. Bartenstein, Richard S. Weitzel, Ropes

& Gray, Thomas A. Palombo, Special Assistant Attorney General, and

Jeffrey B. Pine, Attorney General, were on brief for defendants

Nancy Mayer and Retirement Board of the Employees' Retirement

System of the State of Rhode Island and Joann Flaminio in her

capacity as Executive Director.

     Robert H. Chanin with whom John M. West, Jonathan D. Hacker,

Bredhoff & Kaiser, P.L.L.C., Thomas J. Ligouri, Jr., Richard A.

Skolnick and Skolnick, McIntyre & Tate were on brief for plaintiffs

National Education Association-Rhode Island, et al.

     Marc B. Gursky with whom Gursky Law Associates was on brief

for plaintiff Richard R. Deorsey. 


March 24, 1999


BOUDIN, Circuit Judge.  In 1936, Rhode Island created a

retirement system for state employees, school teachers, and other

employees of cities and towns that chose to participate. R.I. Gen.

Laws  36-8-1 to 36-10-39.  The retirement system is administered

by the Retirement Board ("the Board"), which is chaired by the

state treasurer.  R.I. Gen. Laws  36-8-4, 36-8-9.  The retirement

system is a "defined benefit plan" in which benefits are determined

not by the amount contributed during service but by a schedule of

benefits that specifies the amount to be paid.

  At present, benefits under the Rhode Island statute are

set as a percentage of the average of the employee's salary earned

during the three highest consecutive years of earnings, multiplied

by the number of years of credited service.  R.I. Gen. Laws  36-

10-10.  An employee may retire and begin receiving payments at any

age after 28 years of service or after reaching age 60 and

completing 10 years of service.  Id.  36-10-9.  Employees

contribute a fixed percentage of annual earnings to the retirement

system, but the state pays the balance needed to provide the

scheduled benefit.  Id.  36-10-2.

  In the 1980s, teachers' unions in Rhode Island sought

legislation to allow employees of unions representing state

employees including teachers to participate in the state retirement

system; these union employees are not, at least in that capacity,

public employees.  Thus, the statute needed to be amended to permit

them to receive benefits.  In early 1987, a bill embodying such a

proposal was introduced and placed on the legislature's consent

calendar; and it was passed on the final day of the session without

debate and apparently without much public notice.

  The new provision, codified at R.I. Gen. Laws  36-9-33, 

not only allowed union employees to join the retirement system, but

also permitted them to purchase credit, on payment of a modest

amount to the system, for all years previously served with the

union.  This allowed the union employee to treat all prior years

of employment by the union as years of public service needed to

qualify for state pension benefits and to treat earnings from the

union as if they were public compensation for purposes of computing

the "highest three (3) consecutive years" average.  Id.  36-10-10.

     Furthermore, the provision allowed union employees to

receive pension benefits based on salaries over which the state had

no control.  Because the retirement system calculates benefits

based on the average of the three highest consecutive years' salary

(multiplied by a factor based on years of service), the union could

raise salaries for pension-qualifying union employees and thereby

boost their pension benefits from the state retirement system.  The

record reflects significant increases in union employee salaries

following the passage of section 36-9-33.

     The effect, as more fully described below, was to allow 

a number of highly paid union officials to qualify for state

pensions almost immediately in amounts greatly in excess of their

contributions to the system.  The pensions were in addition to, not

in place of, whatever pensions were provided by the union.  The

district court later calculated the plaintiffs' total contribution

to the Retirement System at $1,995,784, the present value of their

projected pension benefits at about $11,430,579, and an average

projected rate of return for the individual plaintiffs of

approximately 1250 percent.

     When the situation became widely known, the legislature

repealed section 36-9-33 in toto on June 9, 1988.  See 1988 R.I.

Pub. Laws ch. 486 ("the Repeal Act").  At that time, applications

by union employees were pending before the Board, which had

declined to process them.  Despite the repeal, two teachers' unions

filed suit in October 1988 and later succeeded in persuading a

state court judge that the repeal was prospective only and did not

permit the Board to exclude union employees who had sought to

become members and purchase credits prior to the repeal.  See RIFTv. Retirement Sys., No. PC 88-4974 (R.I. Sup. Ct. Dec. 21, 1989).

     As a result, qualified union employees then entered the

retirement system, some retiring fairly soon after.  Bernard

Singleton, for example, became a member of the Retirement System

effective January 1, 1990 (as did other individual plaintiffs) and

promptly purchased roughly 25 years of service credit for his prior

union employment at a cost of $25,411.09.  On July 28, 1990,

several months later, at age 52, he took "early retirement" and

immediately began to collect a pension of approximately $53,000 per

year, with an expected lifetime benefit of about $750,000.

     In July 1994, the legislature responded by "evicting" the

union employees.  See 1994 R.I. Pub. Laws ch. 413,  1, codified at

R.I. Gen. Laws  36-9.1-l et seq. ("the Eviction Act").  The new

statute, which sparked the present litigation, terminated pensions

for union employees who had entered under the now repealed statute. 

It provided for return of their contributions, with interest,

reduced by any benefits they had received.  Id.  The Eviction Act

stated that inclusion of union employees had "no rational

relationship to any legitimate governmental purpose" and would

invade the corpus in violation of the requirements of the Internal

Revenue Code.  Id.  36-9.1-1.

     Two teachers' unions and 22 present or former union

employees then brought the present suit in the district court in

July 1994 against the Board, its chairperson, and its executive

director.  The plaintiffs alleged that the Eviction Act violated

the Contract, Takings and Due Process Clauses of the Constitution,

see U.S. Const. art. I,  10, cl. 1; id. amend. V; id. amend. XIV,

and that under 42 U.S.C.  1983, they were entitled to declaratory

relief, an injunction, restoration of any benefits wrongly

withheld, and attorney's fees.  

     The district court denied the defendants' motion to

dismiss.  See National Educ. Ass'n-R.I. v. Retirement Bd., 890 F.

Supp. 1143, 1165 (D.R.I. 1995) ("NEA I").  Following discovery and

cross motions for summary judgment, the district court decided the

heart of the case in a detailed and lucid opinion on August 7,

1997.  See National Educ. Ass'n-R.I. v. Retirement Bd. of R.I.

Employees' Retirement Sys., 972 F. Supp. 100 (D.R.I. 1997) ("NEA

II").  The decision resolved all legal issues but reserved for

later disposition a few factual questions as to the status of three

individual plaintiffs.

     In a nutshell, the district court ruled that the Takings

Clause protected the benefits of two groups of plaintiffs: those

who were eligible to retire and had retired by the date of the

Eviction Act (July 15, 1994), and those who were eligible to retire

but were still working as of that date.  Three other plaintiffs

who were still working and were not eligible for retirement at the

date of the Eviction Act were held not protected by the Takings

Clause or by the Contract Clause or by substantive due process

concepts.  See id. at 114-15.

     Given these legal rulings, the parties then stipulated as

to the status of two of the other remaining plaintiffs--one was

eligible to retire and therefore protected and the other was not--

leaving only one plaintiff (DeOrsey) whose status was contested. 

In April 1998, the district court conducted a bench trial and ruled

that DeOrsey had never been eligible to join the retirement system. 

Thereafter, the district court entered a final judgment in favor of

the eligible plaintiffs and against the ineligible ones.  The

defendants now appeal from the first part of the judgment, and the

ineligible plaintiffs, together with DeOrsey, from the second.

     On appeal, our review is de novo as to the legal issues

resolved on summary judgment, see Terry v. Bayer Corp., 145 F.3d

28, 34 (1st Cir. 1998), and for clear error as to the factual

issues resolved at DeOrsey's bench trial.  See Williams v. Poulas,

11 F.3d 271, 278 (1st Cir. 1993).  We begin with the plaintiffs'

Contract Clause claims, if only because most of the precedent

addresses such cases under this rubric.  The claims raise  a

difficult set of issues that were expressly reserved in this

court's leading decision in McGrath v. Rhode Island Retirement

Board, 88 F.3d 12 (1st Cir. 1996), further complicated by the

somewhat eccentric facts of this case.

     Pension plans come in all sorts of shapes and sizes but

the typical plan contemplates  a stream of payments to be received

by the employee starting upon retirement; both the terms and the

payment formula are normally stated in the plan.  In defined

benefit plans, such as that of Rhode Island, the employee may be

required to contribute during employment; but much of the payout is

contributed by the employer, often funded in advance at least in

part.  See generally 1 J. Mamorsky, Employee Benefits Law:  ERISA

and Beyond  1.01-1.05, at 1-2 to 1-25 (1998).

     Although such plans may be negotiated as explicit

contracts (e.g., as part of a collective bargaining agreement),

quite often they are simply "plans."  The plans may or may not have

language binding the employer not to change them (at least in

certain circumstances) or reserving its right to do so (at least in

certain circumstances).  Often, such plans have "vesting"

provisions, but strictly speaking such provisions usually 

describe how the existing plan operates and not whether the plan

itself can be altered unilaterally by the employer.  "Vesting" and

"contractual" are not synonymous.

     In McGrath, this court surveyed the case law and

concluded that with respect to private pension plans, the courts

were divided, but that a substantial body of case law treats such

plans as implied contracts, protecting at least those whose rights

have "vested."  McGrath, 88 F.3d at 16-17.  The theory is that the

plan is an offer and the employee, by working for many years

pursuant to the plan, has relied on and accepted the offer, which

cannot now be changed unilaterally as to a vested employee, whether

still working or retired.  Id. at 17.  Of course, the plan may

still explicitly reserve rights to alter vested benefits.

     The case law concerning public-employee pensions is  less

settled.  Some courts, including this one, have been quite hesitant

to infer a contract where the state pension statute neither speaks

in the language of contract nor explicitly precludes amendment of

the plan.  See, e.g., Parker, 123 F.3d at 5-6.  After all,

legislatures regularly modify compensation schedules and benefit

programs.  Supreme Court precedent has tended to treat government

pension statutes as similarly subject to modification for payments

not yet made, unless the government's intent to create a contract

is clear and definite.  See, e.g., Dodge v. Board of Educ., 302

U.S. 74, 78-79 (1937).

     Thus, 

     absent 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.'  Dodge v. Board of Educ.,

     302 U.S. 74, 79 (1937). . . . [T]he 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. v. Atchinson, Topeka & Santa Fe Ry.

Co., 470 U.S. 451, 465-66 (1985) (emphasis added).

     Although National Railroad involved a claim that federal

statute created contractual rights, the Dodge case cited by the

Court with approval in National Railroad involved a state pension

statute for teachers; and in Dodge the Court explicitly held that

a reduction in pensions for already retired teachers did not

violate the Contract Clause.  See Dodge, 302 U.S. at 81.  More

recently, the Supreme Court allowed a statutory reduction in

railroad worker pensions for some "vested" workers, noting that

"railroad benefits, like social security benefits, are not

contractual and may be altered . . . ."  United States R.R.

Retirement Bd. v. Fritz, 449 U.S. 166, 173 (1980) (citations

omitted).

     The clear statement requirement for "legislative"

contracts has been regularly imposed by the Supreme Court and

followed by this court.  The policy reasons for protecting

legislative power against implied surrender are too obvious to

warrant much elaboration, see National Railroad, 470 U.S. at 466;

McGrath, 88 F.3d at 19, and it is easy enough for a statute

explicitly to authorize a contract or to say explicitly that the

benefits are contractual promises, or that any changes will not

apply to a specific class of beneficiaries (e.g., those who have

retired), cf. Parker, 123 F.3d at 8-9.

     We do not think that the Rhode Island general pension

statute "clearly and unequivocally" contracts for future benefits

either by language or--in the circumstances of this case--through

the nature of the relationship.  Nowhere does the statute call the

pension plan a "contract" or contain an anti-retroactivity clause

as to future changes.  Compare Brand, 303 U.S. at 105.  The closest

that the statute comes is a provision headed "Guaranty by state--

Annual appropriations" which provides, inter alia, that 

     it is the intention of the state to make

     payment of the annuities, benefits, and

     retirement allowances provided for under the

     provisions of this chapter and . . . to make

     the appropriations required by the state to

     meet its obligations to the extent provided in

     this chapter.  The general assembly shall make

     annual appropriations which shall be

     sufficient to provide for the payment of

     annuities, benefits, and retirement allowances

     required of the state under this chapter.

R.I. Gen. Laws  36-10-7.  This certainly directs state officials

to fund the plan as it exists.  But it falls at least a step short

of clearly expressing a contractual commitment not to change

benefit levels or other plan variables by legislation.  CompareParker, 123 F.3d at 8-9.

     Nor we do think that references in the statute to

"vesting" create a contract.  Often, and clearly so in Rhode

Island's statute, "vesting" refers to the period provided by a plan

for which an employee must work to become eligible for a pension if

and when he attains retirement age.  See note 1, above.  Whether a

plan affords contractual protections against a change in its terms

is a different question.  A plan may not protect "vested" employees

against change, see Fritz, 449 U.S. at 169 n.3, 173-74, or

alternatively may provide some contractual protection even for

unvested employees (e.g., against a change in the vesting period),

cf. State of Nevada Employees Ass'n, Inc. v. Keating, 903 F.2d

1223, 1226-27 (9th Cir. 1990).  

     If one turns from language to circumstances, see United

States Trust, 431 U.S. at 17 n.14, it is true that today private

pensions are often conceived and crafted more as deferred

compensation than as gifts.  See Parker, 123 F.3d at 6-8; McGrath,

88 F.3d at 16-19.  But pensions can still be created (and

withdrawn) without contract; this was just what the Supreme Court

found as to railroad retirement benefits in Fritz itself.  SeeFritz, 449 U.S. at 174; see also Hisquierdo v. Hisquierdo, 439 U.S.

572, 575 (1979).  Further, Rhode Island's general pension plan was

created in 1936 when the view of pensions taken in Dodge was quite

widespread.

     Rhode Island case law points in both directions.  The

state supreme court has implied that under state law pensions

cannot be freely terminated; but it has also allowed cut-offs (of,

for example, a faithless judge) not easily reconciled with a strict

contract theory.  See In re Almeida, 611 A.2d 1375 (R.I. 1992).  In

all events, whether a contract exists for Contract Clause purposes

is a federal question.  See General Motors Corp. v. Romein, 503

U.S. 181, 187 (1992).

     The existence of an employer-employee relationship does

weigh in favor of finding an implied contract, as the non-

governmental pension cases make clear.  See McGrath, 88 F.3d at 17

(summarizing case law).  However, the force of this consideration

is very much muted in this case:  these particular plaintiffs do

not have the benefit of a clear and longstanding employer-employee

relationship with the government--they are far from the

quintessential 10 or 28-years-of-service government employees.

     We decline to decide now whether this last consideration

would tip the balance if, for example, Rhode Island took a meat axe

to the pensions of long-time state employees.  In many states,

there are express limitations on such changes; and in general,

political constraints make them unlikely (but not impossible). 

In all events, the clear statement rule is binding unless and until

altered by the Supreme Court, see State Oil Co. v. Khan, 118 S. Ct.

275, 284 (1997); and the conundrum of a "statutory" contract that

may meet this requirement by clear implication rather than clear

language is an issue happily deferred.

     We turn now to the basis given by the district court for

granting relief, namely, that the future payments constituted a

property right that could not be infringed without payment of

compensation to retirees or employees eligible to retire.  In

McGrath, we explicitly reserved decision on this issue, seeMcGrath, 88 F.3d at 20 n.9, finding that the pension expectancies

at issue had not even vested at the time that they were modified by

the legislature.  Here, the issue can no longer be fully postponed.

     The Fifth Amendment forbids the federal government from 

taking "property" for public use without just compensation, and

this limitation has been extended to the states through the

Fourteenth Amendment.  See Webb's Fabulous Pharmacies, Inc. v.

Beckwith, 449 U.S. 155, 160 (1980).  What constitutes "property"

for this purpose is  a recurring issue to which no mechanical

answer has been found.  The concept includes more than tangible

property owned outright, see United States v. Willow River Power

Co., 324 U.S. 499, 502-03 (1945), and has been extended to

materialmen's liens, see Armstrong v. United States, 364 U.S. 40,

44 (1960), and trade secrets protected under state law, seeRuckelshaus v. Monsanto Co., 467 U.S. 986, 1003-04 (1984).

     But the Supreme Court has also made clear that protection

under the Takings Clause does not extend to mere "unilateral

expectation[s]," even if they are entirely plausible expectations

of economic benefit.  Webb's Fabulous Pharmacies, 449 U.S. at 161;

cf. Eastern Enterprises v. Apfel, 118 S. Ct. 2131, 2161-63 (1998)

(Breyer, J., dissenting).  Thus, the Supreme Court has excluded

from the "property" rubric riparian rights recognized under state

law, railroad pensions, and future social service benefits.  Willow

River, 324 U.S. at 502-03 (riparian rights); Hisquierdo, 439 U.S.

at 575 (railroad pensions); Flemming v. Nestor, 363 U.S. 603, 608-

611 (1960) (social security).  This is so even though expectations

are sometimes afforded procedural protection, see, e.g., Goldbergv. Kelly, 397 U.S. 254 (1970), and protection from wholly arbitrary

action, see Fritz, 449 U.S. at 172.  See R. Rotunda & J. Nowak, 2

Constitutional Law:  Substance and Procedure  15.12, at 485 n.4,

 17.5, at 626 (2d ed. 1992).

     In the present case, the Takings Clause does, or arguably

does, to some extent protect some interests of plaintiffs under the

pension plan.  Pension payments actually made to retirees become

their property and are protected against takings, even if and where

the payments are unquestionably a gift.  Similarly, anything that

the employee contributed, directly or by purchase of benefits, may

well be regarded as the employee's property.  Under the Rhode

Island plan, contributions are returned with interest even to a

non-vested employee who leaves the state's employment.  See R.I.

Gen. Laws  36-10-8.  However, the Eviction Act did not purport to

reclaim any benefits actually paid, and it provided for the return

of any member contributions, with interest, to the extent that they

exceeded already paid-out benefits.  See R.I. Gen. Laws  36-9.1-

2(a), (b).

     Thus, the question for us is whether, apart from what has

been paid in by the member or already paid out by the state, the

prospective payments of the state's share of the defined benefits

are currently "property" of the plaintiffs under the Takings

Clause.  If there were a contractual right to such payment, that

right itself would be property for the purposes of the Takings

Clause.  See United States Trust, 431 U.S. at 11 n.16.  But in this

case we have already said that the state's prospective payments,

over and above the members' contributions, are not contractually

obligated under the Contract Clause--at least as to "last minute"

entrants such as the plaintiffs.

     In Hoffman, we concluded that "[n]oncontractual employee

benefits that a recipient has not yet received, but has a mere

expectation of receiving, are not property as to which the

government, before repealing, must provide just compensation." 

Hoffman, 909 F.2d at 616.  There we denied a contract clause claim

because a pension statute did not clearly indicate an intent to

bind the legislature contractually, see id. at 614, and then denied

a takings claim because there was no enforceable contract right,

see id. at 616; cf. Fritz, 449 U.S. at 174.  That decision is

controlling here.

     This position is virtually compelled by Supreme Court

cases that, after finding that an expected statutory benefit did

not constitute a contract right, rejected the claim to payment. 

See, e.g., National Railroad, 470 U.S. at 466-67, 478-79; Flemming,

363 U.S. at 610-11; Dodge, 302 U.S. at 78-81.  It would make

nonsense of such rulings--and the clear intent requirement--to

conclude that an expectancy insufficient to constitute an

enforceable contract against the state could simply be renamed

"property" and enforced as a promise through the back door under

the Takings Clause.  

     This brings us to the final constitutional attack on the 

Eviction Act:  the claim that it violates "substantive" due

process.  An expectation that is not "property" for purposes of the

Takings Clause may yet sometimes entitle the citizen to procedural

protection, and substantive protection against arbitrariness,

before the expectation is cut off by government action.  SeeFlemming, 363 U.S. at 610-11; Hoffman, 909 F.2d at 618.  The

plaintiffs' claim here is to substantive protection (no procedural

rights have been denied), but the due process standard in economic

matters is one of minimum rationality.  See Usery v. Turner Elkhorn

Mining Co., 428 U.S. 1, 17 (1976); Hoffman, 909 F.2d at 618.

     When Congress curtailed pension rights of certain vested

railroad employees to prevent windfall benefits, it made fairly

mechanical judgments about who should be grandfathered into double

pensions and who should not, and the Supreme Court upheld those

judgments.  See Fritz, 449 U.S. at 174, 179-80.  Similarly, we only

recently upheld against such an attack certain distinctions made by

Congress in social security payments to limit duplicative recovery,

even while recognizing that the restrictions involved some fairly

gross distinctions that could hardly be described as perfect

justice.  See Splude v. Apfel, 165 F.3d 85, 92 (1st Cir. 1999).

     Here, the class of persons who have been "evicted" are

individuals who were never public employees--at least in the

capacity for which the state pensions are sought--and were

permitted to enter the system at bargain-basement prices while

retaining their pensions as union employees.  The discrepancies

between what they contributed as a class and what they might expect

in pensions was striking.  And almost at once, they were warned of

legislative efforts to undo their unusual benefits.  The first such

attempt (the Repeal Act) was frustrated in state court, but the

Eviction Act followed hard on its heels.

     At argument, plaintiffs' counsel pointed out that the

legislature has in the past given special pension benefits to

favored groups, allowing (for example) veterans to "purchase" years

of credit.  Cf. McGrath, 88 F.3d at 13 (describing R.I. Gen. Laws 

 45-21-9, 45-21-53).  But especially in economic regulation, the

question is not whether the legislature has dealt perfectly with

all possible problems but whether its choice in this instance was

rational.  See Pension Benefit Guaranty Corp. v. R.A. Gray & Co.,

467 U.S. 717, 730 (1984); Fritz, 449 U.S. at 176-77; Hoffman, 909

F.2d at 618.  Here, the choice to evict this group of members,

returning to them their contributions with interest, is not so

patently arbitrary, irrational, or unrelated to a legitimate

legislative purpose as to constitute a violation of substantive due

process.

     Our resolution makes it unnecessary to discuss whether

the additional plaintiffs, to whom the district court denied

relief, were "eligible" or bona fide members of the plan.  It

reserves, once again, the very difficult case of the long-time

vested or eligible employee whose benefits might be curtailed.  And

it leaves it open to Rhode Island and its employees to address such

matters by explicit legislation or ordinary contract, the course

best suited to achieve certainty on both sides.

     The decision of the district court is vacated and the

matter is remanded for entry of a judgment dismissing the

complaint.

     It is so ordered.