SB 1609 (April 2011).
Type of reform:
The bill increased employee contribution rates from 7 percent to 10 percent and altered the formula for calculating the cost-of-living adjustments (COLAs) to reduce the previous 4 percent annual increase.
Status of Litigation:
All lawsuits brought challenges to the legislation based on the following:
1. Art. 29, § 1(C) of the Arizona Constitution which states, “Membership in a public retirement system is a contractual relationship that is subject to Article II, §25, and public retirement system benefits shall not be diminished or impaired.”
2. Art. II, § 25 of the Arizona Constitution which states, “No bill of attainder, ex-post-facto law, or law impairing the obligations of a contract, shall ever be enacted.”
3. Yeazell v. Copins (1965), which held that a public employee’s interest in his retirement pension is a contractual one that vests at the outset of employment; and, the employee has a vested right to continued membership in the retirement pension plan “under the same rules and regulations existing at the time of his employment.”
The plaintiffs (retired judges) sued, arguing that the legislation violated the Arizona Constitution’s contracts clause and pension protection clause. On May 21, 2012, Judge Oberbillig granted declaratory judgment in favor of the plaintiffs, followed by a later injunction (Aug. 30, 2012) that ordered the state to transfer funds into a reserve for future benefit increases and to pay retirement benefits based on the previous law. Specifically, the judge found that the Arizona Constitution (Article 29, Section 1(C)) provides that “public retirement benefits shall not be diminished or impaired.” Because the plaintiffs had already retired, they had “fully performed every condition for a benefit,” and “the benefits that plaintiffs are vested in are plainly the benefits in effect at the time of their retirement.” Thus, reducing COLAs thereafter was not permissible.
On Feb. 20, 2014, the Arizona Supreme Court (5-0) upheld Judge Oberbillig’s ruling that the reforms were unconstitutional and reinstated the COLAs. The Supreme Court found that the pension plan initially adopted by the Legislature had promised to use a certain formula for calculating benefits and that formula could not be tinkered with for employees whose rights had vested.
The plaintiffs, Philip Hall and Jon W. Thompson, were sitting judges on the Arizona Court of Appeals before SB1609 went into effect in 2011. They sued on behalf of all active Arizona state judges based on the Arizona Constitution’s contracts clause (Art. 2 §25) and pension protection clause (Art. 29 §1). Additionally, they sought relief under the Arizona Constitution’s judicial salary clause, which provides that “[t]he salary of any justice or judge shall not be reduced during the term of office for which he was elected or appointed.” Art. 6 §33. The plaintiffs sought a return of their contributions in excess of 7 percent and an injunction requiring the plan calculate the COLA according to the method used prior to the enactment of SB 1609.
On March 26, 2013, Judge Reyes granted partial summary judgment to the plaintiffs and found that the previous contribution rates and formula for calculating COLAs were public retirement system benefits under the state’s constitution. Accordingly, he determined that requiring judges to increase their contribution and adjusting the COLA calculations violated the Arizona Constitution’s pension protection clause. Judge Reyes denied summary judgment for any plaintiffs who had begun employment after the enactment of the 2000 EORP vesting statute, which required that vesting of pension benefits did not occur until an employee applied for benefits. Before 2000, vesting was controlled by the decision in Yeazell v. Copins, and an employee’s right to pension benefits vested upon employment.
Both parties moved for reconsideration. On July 24, 2013, Judge Reyes granted the plaintiffs’ motion for reconsideration with respect to the constitutional validity of the 2000 EORP vesting statute vis-à-vis SB 1609, and found that SB 1609 was unconstitutional even as it pertains to employees hired after 2000.
The court heard oral argument on the plaintiffs’ motion for a final judgment and request for prejudgment interest on Jan. 23, 2015. On Jan. 27, 2015, the court issued a final judgment. The court held that portions of SB 1609 regarding the Elected Officials Retirement Program (EORP) are unconstitutional, and directed EORP to remedy the constitutional violation within a reasonable amount of time. The court noted that the remedy “might involve direct repayments or credits.” If the plaintiffs are dissatisfied with EORP’s remedy, or the timeliness of such remedy, they may return to the court to seek appropriate relief. With respect to prejudgment interest, the court held that the circumstances did not dictate that the plaintiffs were entitled to such interest.
Following the entry of the final judgment in Superior Court, defendants EORP and the state of Arizona filed notices of appeal. The plaintiffs filed a cross-appeal seeking attorneys’ fees, prejudgment interest and application of the holding to the State (as intevenor defendant).
Because the plaintiffs were members of the appellate bench, the case (on joint motion) bypassed the Court of Appeals. On June 11, 2015, it was docketed in the Arizona Supreme Court as Case No. CV-15-0180-T/AP.
On July 6, the Arizona Supreme Court recused itself and appointed five subordinate justices to hear the appeal. The justices were selected because they came into their positions after the new law went into effect and would not, therefore, be affected by the outcome of the case.
On Nov. 10, 2016, the Arizona Supreme Court affirmed the lower court’s decision, finding that plaintiffs were entitled to a specific formula for their Pension, which included the COLA and, accordingly the modifications to the COLA in SB1609 violated the Arizona Constitution’s Pension Clause.
The plaintiffs’ principal argument was that the change decreasing the COLA and increasing their contribution violated the Pension Clause of the Arizona Constitution, article 29, section 1, which provides that “public system retirement benefits shall not be diminished or impaired.” Additionally, the plaintiffs contended that the COLA and prior contribution rate were part of the specific formula of their pensions under the Arizona Supreme Court decision in Yeazell v. Copins, 98 Ariz. 109, 402, P.2d 541 (1965), and, therefore, are protected from unilateral modification by the state.
Generally, the Court noted that Yeazell held that the state legislature cannot unilaterally alter a state employee’s benefits from those that were in effect at the time the employee began her employment. The Court explained that Yeazell addressed the unique situation in Arizona, which is that pension benefits could not be considered “gratuities” (as other states at the time considered them) because the Arizona Constitution’s Gift Clause expressly prohibited the state from providing any donation or subsidy to any individual. [Opinion, p. 9 (citing Ariz. Const. art. 9, §7)] Thus, Yeazell, acknowledged that pension benefits “were not gratuities, but were, in the nature of contracts, viewed as deferred compensation for services rendered.” Under Yeazell, therefore, the Arizona rule has been that pension benefits are contractual—because anything other than contractual would make them prohibited gifts.
Under Yeazell, when the plaintiffs were hired “they entered into a contractual relationship with the State.” The reforms that modified the plaintiffs’ pension benefits were thus invalid because the reduction in the COLA and increased contribution rate were a violation of this contract. Moreover, the state should have known it would have to bear the risk of decreased value in the pensions (due to loss of investment value), and cannot now shift that risk to its employees.
The EORP and the state urged the Court to consider that even if Yeazell established a contractual relationship, the vesting statute of 2000 allowed the legislature to modify the terms of a pension before a state employee’s retirement. The vesting statute provides that:
A member of the plan does not have a vested right to benefits under the plan until the member files an application for benefits and is found eligible for those benefits. An eligible claimant’s right to benefits vests on the date of the member’s application for those benefits or the member’s last day of employment under the plan, whichever occurs first.
(A.R.S. § 38–810.02) The Court, in looking at the vesting statute, rejected the defendants’ argument because to read the statute as the defendants suggest would “alter earlier established substantive rights to particular retirement benefits, violating Yeazell.” (Opinion, p. 17) Instead, the Court interpreted the vesting statute to mean that an employees’ right to begin collecting benefits is contingent upon completing the requisite employment requirements, and that the the employee is entitled to benefits upon accepting employment.
The Rappleyea case is similar to the Fields case in that both sets of plaintiffs were already retired at the time of the legislation. The Rappleyea case had been stayed pending the outcome of Fields. On Aug. 11, 2014, the court entered a final judgment and injunction, pursuant to the parties’ stipulation and in accordance with the Fields decision.
The Parker case is similar to the Hall case in that it involves the rights of active law enforcement officers. As of April 13, 2015, the Parker case remained stayed pending the outcome of the Hall appeal.
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