Type of reform:
On June 30, 2011, the state of Rhode Island passed the State Medicare Enrollment Statute, which provided that municipalities—participating or not participating in the municipal employees’ retirement system—may require their employees to enroll in Medicare, notwithstanding other available benefits.
Subsequently, on July 19, the city of Providence passed the Medicare Ordinance requiring employees and retired employees to enroll in Medicare and providing that all benefits to retirees under the city’s health plans would be secondary to Medicare.
The Pension Ordinance, enacted on April 19, 2012, suspended COLAs until the pension system reached a funding ratio of 70 percent.
Case: Andrews v. Lombardi, C.A. No. KC-13-1128 (Sup. Ct. Rhode Island)
Status of Litigation:
In October 2011, a number of retirees and the Providence Retired Police and Firefighters Association filed suit (C.A. No. 11-5853) challenging the constitutionality of the Medicare Ordinance. The Superior Court initially granted the plaintiffs’ motion for a temporary restraining order. In April 2012, the city passed the Pension Ordinance. Shortly thereafter, the court certified the plaintiffs in the lawsuit as a class and ordered the parties and the relevant labor unions to mediation.
The parties ultimately entered into a settlement and consent decree (http://clerkshq.com/content/Attachments/Providence-ri/2013_165.pdf) that was approved by the court in April 2013.
The 67 plaintiffs in Andrews v. Lombardi are those that chose to opt out of the consent decree. Although the plaintiffs were certified as a class, the court categorized the plaintiffs (all of which were police or firefighter retirees) into groups A-L, depending upon what collective bargaining agreements were in place at the time they retired or what prior litigation settlements were relevant to their pension benefits. The plaintiffs alleged that the Medicare Ordinance and the Pension Ordinance breached their contract rights and the Contract Clause of both the U.S. and Rhode Island Constitutions.
In analyzing the constitutionality of both the Pension Ordinance and the Medicare Ordinance, the court applied the three-pronged analysis for unconstitutional impairment of contracts, whether (i) the modification results in impairment; (ii) the impairment is substantial; and (iii) the impairment is not reasonable and necessary to fulfill a specific and legitimate public purpose.
Although the plaintiffs alleged breach of contract as well as unconstitutional impairment of contracts, the court found that due to the statutory language of the ordinances—and the preclusion of remedies and defense to breach of contract actions therein—the claims presented by the plaintiffs more accurately concern the issue of unconstitutional impairment of contracts rather than breach of contract.
The court first considered the Pension Ordinance and the modification of the COLA under the three-pronged test for unconstitutional impairment of contracts and found that the plaintiffs in all categories had met their burden to establish that they had a contractual right to their COLA. Then, the court found that based upon the evidence presented at trial, the loss of the COLA was a substantial impairment. The court found that many plaintiffs had rearranged retirement plans as a consequence and had to reexamine how to provide for their families. Additionally, the court found that the plaintiffs’ reliance on the continued COLA had been reasonable.
The court also found, however, that the evidence presented at trial indicated that the city was in a dire financial crisis and on the precipice of bankruptcy, and that the Pension Ordinance was enacted in a last-ditch effort to save the city—which amounted to a legitimate public purpose. Finally, the court found that the modifications (the suspension of the COLA) were reasonable and necessary because there was not a more viable alternative that could have been implemented to adequately address the city’s financial crisis. Accordingly, the court concluded that the Pension Ordinance did not violate the Contract Clause of the Rhode Island or U.S. Constitutions.
With respect to the Medicare Ordinance, the court again applied the three-pronged test for determining if legislation is an unconstitutional impairment of contracts. First, in determining if a contractual relationship existed, the court found that all of the plaintiffs established the existence of a contractual obligation to receive healthcare, either from a collective bargaining agreement or other representation from the defendants. The court also found, however, that certain plaintiffs failed to show that the change in healthcare benefits was a substantial impairment. Those plaintiffs who had been promised healthcare in some fashion under collective bargaining agreements had not been promised that they would be provided healthcare under the city’s plan—but rather, any plan. “Applying the language of the CBA [collective bargaining agreement] at face value, the Court concludes that the City has not impaired – let alone substantially impaired – its contractual obligation to Plaintiffs.” (Opinion, p. 78)
For the remaining plaintiffs, the city’s obligation to provide healthcare came from an “implied-in-fact” contract, and there is no language requiring the city to continue to provide supplemental coverage if the retirees were to become eligible under another health plan. The testimony at trial, the court determined, showed that these plaintiffs reasonably relied upon the city’s healthcare plans in accepting employment and, thus, the Medicare Ordinance amounts to a substantial impairment.
In determining whether the Medicare Ordinance served a significant and legitimate public purpose, the court concluded that the city faced an unfunded healthcare liability of approximately $1.5 billion and faced an “unprecedented emergency.” (Opinion, p. 85—citing testimony of Mr. Almonte the Auditor General for the State of Rhode Island) The purpose of the Medicare Ordinance was to remedy a significant general economic problem, not increase financial gain for the state. Accordingly, the court found that the Medicare Ordinance was passed for a significant and public purpose.
Finally, in considering whether the Medicare Ordinance was “reasonable and necessary” the court determined that the city had attempted other alternatives without success (such as increasing tax contributions from non-profit organizations and universities and raising taxes), and that no more moderate course was available. The court noted that the prospective nature of the legislation contributed to its reasonableness in light of the circumstances. Thus, the Medicare Ordinance was not an unconstitutional impairment of contracts.
The court denied the request for a permanent injunction and entered judgment for the defendant.
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