National Education v. Retirement Board ( 1999 )

  •             United States Court of Appeals
                    For the First Circuit
    No. 98-1763
    No. 98-1782
            Plaintiffs, Appellees/Cross-Appellants,
            Defendants, Appellants/Cross-Appellees.
                      RICHARD R. DeORSEY,
                     Plaintiff, Appellant.
         [Hon. Ronald R. Lagueux, U.S. District Judge]
                    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
    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).
    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.
    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
    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
    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.
    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
    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
    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
    It is so ordered.