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TESTIMONY OF DANIEL K. KINDER, ESQ.

My name is Daniel Kinder. I’m an attorney practicing with the Providence firm Little Medeiros Kinder Bulman & Whitney. I have practiced labor and employment law on management’s side in the private, public and non-profit sectors in Rhode Island and nationally for thirty years.

I understand that I’m here to advise the Commission on the law of the State of Rhode Island and the federal law, with respect to changing the state’s retirement plan for state employees and public school teachers.

Let’s begin with the federal law.[1]

Under federal law, if you have a rational reason you can change the state’s pension statute. The only exception is where the legislature has made its intent “unmistakable” that the old statute is a “contract” with employees that cannot be changed. If there is an unmistakable, clear and unequivocal statement of an intention to contract, then the Constitution’s Contract Clause comes into play.[2]

The First Circuit Court of Appeals, which governs federal decisions in Rhode Island, has looked at the Rhode Island State Employees’ Pension Act twice, and it has found no such “unmistakable” intent in our statute.[3]

The First Circuit has also said however, that the “unmistakable” intent to contract may be shown from circumstances, not just by the words of the statute.

The Court has been clear that it is uncomfortable ever saying that “unmistakable intent” can be implied from circumstances, but has also said it’s theoretically possible.[4]

The Court has said that if an employee had worked for the State for 10 or 28 years, under a statute that provided particular benefits, the question of whether those benefits could be “meat axed” retroactively is an open question.[5]

But none of the suggestions of change that have been discussed by the Commission, as I understand it, involve rolling back benefits retroactively for long service employees.[6]

The federal cases do not suggest any legal impediments to changing benefits prospectively.[7] In other words, if the benefits already earned under the old statute are frozen for all employees with 10 years of credited service or more, and a new, lesser set of benefits is adopted on a go-forward basis, the cases indicate there is absolutely nothing wrong with that. By amending the statute to establish a new set of benefits, the legislature defeats any argument an employee might make that there was an unmistakable intent in the legislature to provide the old, greater benefits after that time.

To say that another way: you can now draw a line as of, say, June 30, 2009, and say that all benefits vested under the old plan as of that date are fixed, but all that will be earned after that date will be based on a new, lower formula. And, as the law stands in the First Circuit today, the new formula can be applied retroactively to non-vested employees, so all their service, past and future, will be applied to the new benefits formula.[8]

On the federal decisions governing Rhode Island today, these points are entirely clear.

Under the federal law, even if the unmistakable intent to contract were present, the State still could amend the statute if the resulting impairment of the contract was not “substantial,”[9] or if the amendment was reasonable and necessary to fulfill an important public purpose.[10] These are more difficult legal tests, and you might be able to meet them if it comes to it, but it seems you won’t have to face these tests, given the reforms you’re considering.[11]

So, let me summarize the First Circuit’s decisions and what they teach about your project: There are essentially 3 layers of Risk. First, there is apparently very low risk.

1.Changes affecting those with less than 10 years of contributory service appear to be fine. Even retroactive changes.

2.Changes that are prospective only, in the sense that what has been earned and vested under the old system is retained, but all future service is applied to the new system, is fine, even for employees who are eligible to retire today.

In those cases, the risk that a legal challenge would succeed appears to be minimal. As I understand it, all the reforms that are under consideration fall into this “very low risk” category.

The risk is somewhat greater if the amendments retroactively reduce benefits for vested employees, and that risk grows the greater the number of years the employee has worked as a teacher or for the state. The First Circuit – twice – has said that “vesting” under our Retirement Statute is not the formation of a contract,[12] so you might choose a line of 12 years or 15 years. But there is greater risk in going beyond 10 years for any retroactive reduction.[13]

By a retroactive reduction, I mean that the years of service up to the time of amendment are applied to the new benefits formula, not the old one that existed when the years were worked.

If none of the reforms this Commission is studying imposes a retroactive reduction except to nonvested employees, nothing you are considering runs this increased risk.

The greatest legal risk lies in changing the benefits of those already retired.[14] As I believe that this is not under consideration at all, I won’t dwell on it.

The Federal law calls for fact-specific analysis. Other Federal Courts, applying other states’ laws may say a lot of different things.[15] Fortunately, we have decisions from our own Federal Circuit Court interpreting exactly the same statute in the context of challenges to earlier, retroactive reductions. So we have a high degree of confidence in what can be done here.

We are also fortunate that the Rhode Island Supreme Court has spoken on the legal issues before you, most recently in 2007.

The Supreme Court last year considered whether the City of Providence acted lawfully when in changed its pension ordinance to reduce a COLA for retired police and firefighters from 5% to 3% after they had retired.

Our Supreme Court first said this:

“We acknowledge that the City has broad discretion to prospectively change the pension benefit plan for firefighters and police officers who have not yet retired by enacting a new ordinance. Nevertheless, the issue confronting us is whether the council has authority to retroactively redefine a pension term.”[16]

We expect that the Supreme Court would find that the State also “has broad discretion to prospectively change the pension benefit plan for [state employees] who have not yet retired.” As that is all I know the Commission to be considering, all of the suggestions described [in Appendix A] are “within bounds” under this rule.

Similarly, the Rhode Island Supreme Court said that “pension benefits vest once an employee honorably and faithfully meets the applicable pension statute’s requirements.” The Court held that the Providence retirees’ rights to a 5% COLA vested upon their retirement.

The Court, thus appeared to conclude that employees gained a “contractual” right to statutory pension benefits only upon fulfilling all age and service requirements of the statute.

As none of the reforms under consideration would retroactively impact those who have already retired, again, all appear to meet the interpretations of Rhode Island law by both the State and Federal Courts.

Table of Authorities

  1. Arena v. City of Providence, 919 A.2d 379 (R.I. 2007)
  2. Buchholz v. Storsve, 740 N.W.2d 107 (S.D. 2007)
  3. Kaho’Ohanohano v. State of Hawai’i, 162 P.3d 696 (Hawai’i 2007)
  4. Wiggs v. Edgecombe County, 632 S.E.2d 249 (N.C.App. 2006)
  5. Studier v. Michigan Public School Employees’ Retirement Bd., 698 N.W.2d 350 (Mich. 2005)
  6. Rhode Island Broth. Of Correctional Officers v. Rhode Island, 357 F.3d 42 (1st Cir. 2004)
  7. Picard v. Members of Employee Retirement Bd. of Providence, 275 F.3d 139 (1st Cir. 2001)
  8. MacLean v. State Bd. of Retirement, 733 N.E.2d 1053 (Mass. 2000)
  9. National Education Association – Rhode Island v. Retirement Board of the Rhode Island Employees’ Retirement System, 172 F.3d 22 (1st Cir. 1999)
  10. Parella v. Retirement Board of the Rhode Island Employees’ Retirement System, 173 F.3d 46 (1st Cir. 1999)
  11. Koster v. City of Davenport, Iowa, 183 F.3d 762 (8th Cir. 1999)
  12. Nonnenmacher v. City of Warwick, 722 A.2d 1199 (R.I. 1999)
  13. Eastern Enterprises v. Apfel, 524 U.S. 498 (1998)
  14. Rhode Island Laborers’ District Council v. State of Rhode Island, 145 F.3d 42 (1st Cir. 1998)
  15. Mascio v. Public Employees Retirement System of Ohio, 160 F.3d 310 (6th Cir. 1998)
  16. Howell v. Anne Arundel County, 14 F.Supp.2d 752 (D.Md. 1998)
  17. Bailey v. State of North Carolina, 500 S.E.2d 54 (N.C. 1998)
  18. Schimmeck v. City of Winston-Salem, 502 S.E.2d 909 (N.C.App. 1998)
  19. Parker v. Wakelin, 123 F.3d 1 (1st Cir. 1997)
  20. Retired Adjunct Professors of the State Rhode Island v. Almond, 690 A.2d 1342 (R.I. 1997)
  21. Faulkenbury v. Teachers’ and State Employees’ Retirement System of North Carolina, 483 S.E.2d 422 (N.C. 1997)
  22. McGrath v. Rhode Island Retirement Board, 88 F.3d 12 (1st Cir. 1996)
  23. Hogan v. City of Winston-Salem, 466 S.E.2d 303 (N.C.App. 1996)
  24. Kestler v. Board of Trustees of North Carolina Local Governmental,48 F.3d 800 (4th Cir. 1995)
  25. National Ass’n of Government Employees v. Commonwealth, 646 N.E.2d 106 (Mass. 1995)
  26. Taylor v. State & Educ. Employees Group Ins. Program, 897 P.2d 275 (Okl. 1995)
  27. Spiller v. State, 627 A.2d 513 (Me. 1993)
  28. In Re Commission on Judicial Tenure and Discipline Proceedings against Justice Antonio S. Almeida, 611 A.2d 1375 (R.I. 1992)
  29. State of Nev. Employees Assoc., Inc. v. Keating, 903 F.2d 1223 (9th Cir. 1990)
  30. Simpson v. North Carolina Local Government Employees’ Retirement System, 363 S.E.2d 90 (N.C.App. 1987), affirmed, 372 S.E.2d 559 (N.C. 1988)
  31. Keith Fulton & Sons, Inc. v. New England Teamsters and Trucking Industry Pension Fund, 762 F.2d 1124 (1st Cir. 1984)
  32. Maryland State Teachers Ass’n, Inc. v. Hughes, 594 F.Supp. 1353 (D.C.Md. 1984)
  33. Valdes v. Cory, 139 Cal.App.3d 773 (Cal.App. 3 Dist. 1983)
  34. Marvel v. Dannemann, 490 F.Supp. 170 (D.C.Del. 1980)
  35. United States Trust Co. v. New Jersey, 431 U.S. 1 (1977)

[1] State judicial opinions authoritatively construe the state law, but the federal courts reserve to themselves the decision on whether state pension statutes accord constitutionally protected contract rights to employees. See National Education Association – Rhode Island v. Retirement Board of the Rhode Island Employees’ Retirement System, 172 F.3d 22 (1st Cir. 1999) (“In all events, whether a contract exists for Contract Clause purposes is a federal question.”); Howell v. Anne Arundel County, 14 F.Supp.2d 752, 756 (D.Md. 1998) (“whether there has been an ‘impairment’ is a federal question”). The federal courts will, however, give great weight to the views of Rhode Island’s Supreme Court. See Picard v. Members of Employee Retirement Bd. of Providence, 275 F.3d 139, 144 (1st Cir. 2001).

[2] United States Constitution, Article I, Section 10, Clause 1 (“No state shall . . . pass any . . . law impairing the obligation of contracts . . . . ”). While cases have been brought under other constitutional clauses, such as the Due Process and Takings Clauses, these claims have been found to be insupportable if there is no violation of the Contract Clause. See Rhode Island Broth. Of Correctional Officers v. Rhode Island, 357 F.3d 42, 49 (1st Cir. 2004); Parella v. Retirement Board of the Rhode Island Employees’ Retirement System, 173 F.3d 46, 59 (1st Cir. 1999); National Education Association – Rhode Island v. Retirement Board of the Rhode Island Employees’ Retirement System, 172 F.3d 22, 30 (1st Cir. 1999) (“Pension payments actually made to retirees become their property and are protected against takings . . . . If there were a contractual right to such payment, that right itself would be property for the purposes of the Takings Clause . . . But in this case we have already said that the state’s prospective payments . . . are not contractually obligated under the Contract Clause . . . .”). See also, Eastern Enterprises v. Apfel, 524 U.S. 498 (1998). Rhode Island’s Constitution also has a Contract Clause whose scope is similar to the federal Clause. See Nonnenmacher v. City of Warwick, 722 A.2d 1199, 1200 (R.I. 1999) (noting that the state constitution contains a Contract Clause similar to the federal clause, at R.I. Constitution, Article 1, Section 12); Retired Adjunct Professors of the State Rhode Island v. Almond, 690 A.2d 1342, 1345 n.2 (R.I. 1997).

[3]National Education Association – Rhode Island v. Retirement Board of the Rhode Island Employees’ Retirement System, 172 F.3d 22, 28 (1st Cir. 1999); Parella v. Retirement Board of the Rhode Island Employees’ Retirement System, 173 F.3d 46, 60 (1st Cir. 1999).

[4]See National Education Association – Rhode Island v. Retirement Board of the Rhode Island Employees’ Retirement System, 172 F.3d 22, 28-29 (1st Cir. 1999); Parella v. Retirement Board of the Rhode Island Employees’ Retirement System, 173 F.3d 46, 61 (1st Cir. 1999); Rhode Island Laborers’ District Council v. State of Rhode Island, 145 F.3d 42, 43 (1st Cir. 1998).

[5]Id.

[6] Exhibit A, attached hereto.

[7]See also, Arena v. City of Providence, 919 A.2d 379, 393 (R.I. 2007) (“We acknowledge that the city has broad discretion to prospectively change the pension benefit plan for firefighters and police officers who have not yet retired by enacting a new ordinance.”); Maryland State Teachers Ass’n, Inc. v. Hughes, 594 F.Supp. 1353, 1360 (D.C.Md. 1984) (“A very important prerequisite to the applicability of the Contract Clause at all to an asserted impairment of a contract by state legislative action is that the challenged law operate with retrospective, not prospective effect.”).

[8]Parker v. Wahelin, 123 F.3d 1 (1st Cir. 1997); NEARI v. Retirement Board, supra; Parella v. Retirement Board, supra.

[9] An impairment is a lessening of benefits. Determining whether there is a substantial impairment requires examination of the contracting parties’ expectations. Total destruction of contractual expectations is not necessary to a substantial impairment, but a regulation that restricts gains reasonably expected does not necessarily constitute a substantial impairment. The more regulated the industry, the more expected a diminution should be, and public pensions are heavily regulated. Retired Adjunct Professors of the State Rhode Island v. Almond, 690 A.2d 1342, 1347 (R.I. 1997). “Public pensions have always been a heavily regulated legal arena. Therefore, individual expectations of immunity from future statutory change would have been unwarranted even if these provisions were contractual in nature.”); see also, Nonnenmacher v. City of Warwick, 722 A.2d 1199, 1203 (R.I. 1999), (no substantial impairment where a benefits scheme was modified in a way that did not necessarily assure a lesser benefit than that which was in place when the plaintiffs were hired).

[10]See, e.g., Nonnenmacher v. City of Warwick, 722 A.2d 1199, 1203-1204 (R.I. 1999). “Reasonableness is to be judged in the light of whether the prior state contractual obligations or counterpart private rights had effects that were unforeseen and unintended by the legislature when the contract creating those obligations and rights was created. See Maryland State Teachers Ass’n, Inc. v. Hughes, 594 F.Supp. 1353, 1362 (D.C.Md. 1984) (citing the United States Supreme Court). “The extent of impairment is certainly a relevant factor in determining reasonableness.” United States Trust Co. v. New Jersey, 431 U.S. 1, 27 (1977). “Necessity is to be judged on two levels: 1) whether a less drastic modification could have been implemented; and 2) whether, even without modification, the State could have achieved its stated goals.” See Maryland State Teachers Ass’n, Inc. v. Hughes, 594 F.Supp. 1353, 1362 (D.C.Md. 1984) (citing the United States Supreme Court). See especially, Maryland State Teachers Ass’n, Inc. v. Hughes, 594 F.Supp. 1353, 1368 (D.C.Md. 1984) (“Accepting the conclusion of actuarial soundness of the systems as true, this court observes that neither [case] requires as a matter of State law that the legislature wait until a pension system is actuarially unsound before making changes in that system. Certainly, there is no such federal constitutional requirement. Such a requirement would jeopardize the pension benefits of current and future retirees, would require that the trustees of the Retirement Systems abdicate their role as fiduciaries, and would impose an irrational limitation on the legislature’s police power. A pension system need not be actuarially unsound before a legislature may move to change the system and the benefits it provides its members.”); Retired Adjunct Professors of the State Rhode Island v. Almond, 690 A.2d 1342, 1347-1348 (R.I. 1997) (“[T]he challenged legislation was both reasonable and necessary to advance the legitimate public purpose of fostering public confidence in the State’s retirement system by restricting the proclivity of some public pensioners to indulge in what is colloquially referred to as “double dipping”—that is, the simultaneous receipt by retired public employees of both a salary for state reemployment and a state pension. The 1995 statute limiting the extent of these pensioners’ reemployment earnings from the State would serve, among other purposes, to regulate the extent of such double dipping into the public fisc. The General Assembly was entitled to conclude that a practice whereby retired state college or university professors continue to be employed at public institutions of higher learning while receiving a full state pension is inconsistent with the purpose of providing public pensions to such retirees in the first place. Given the presumptive legitimacy of such a legislative purpose, any frustration of the retired professors’ reemployment expectations would be not only reasonable but arguably necessary to preserve public confidence in the integrity of this pension scheme.”); in Nonnenmacher v. City of Warwick, 722 A.2d 1199, 1203-1204 (R.I. 1999) (emphasis added), that assuming arguendo that the ordinance worked an impairment of a vested contractual right, plaintiffs’ Contract Clause challenge fails insofar as . . . [the enactment] is a reasonable means of fulfilling an important public interest. The two limits imposed by the ordinance, namely the 66 2/3 maximum pension and setoff provision [for income earned during disability], are reasonable restrictions designed to protect the solvency of the city’s pension system. (emphasis added).

[11]See, e.g., Wiggs v. Edgecombe County, 632 S.E.2d 249 (N.C.App. 2006) (Saving taxpayer money, improving retirement system, and correcting inequities—such as “double dipping” where retiree works within system after retiring and collecting from system—are not valid reasons for impairing contractual rights.); Bailey v. State of North Carolina, 500 S.E.2d 54, 67 (N.C. 1998) (A “revenue neutral” approach—meaning that legislators are faced with neither raising taxes nor cutting other programs—may not be reasonable, and it is especially not reasonable if it impairs the vested rights of current and future retirees.); Faulkenbury v. Teachers’ and State Employees’ Retirement System of North Carolina, 483 S.E.2d 422, 429 (N.C. 1997) (Fixing a plan so that it no longer encourages people to take early retirement through disability (i.e. some members of can receive more by taking disability retirement than by continuing to work) is not an important public purpose which justifies the impairment of contractual rights.); Hogan v. City of Winston-Salem, 466 S.E.2d 303 (N.C.App. 1996), affirmed, 477 S.E.2d 150 (N.C. 1996)(An affidavit from a city finance manager stating that changes were necessary to protect the financial integrity of a system was not evidence enough of reasonable means or an important public purpose.); State of Nev. Employees Assoc., Inc. v. Keating, 903 F.2d 1223, 1228 (9th Cir. 1990) (If money raised by chosen modifications could have been raised by other methods—perhaps methods less burdensome than a chosen method, or perhaps methods not even considered—then the modifications may be unconstitutional. For example, a court considered if an amortization period, extended 6 years as part of the funding package, could have been extended another few years to realize the same savings extracted from a detriment dealt directly to employees, or if a 2% cap on post-retirement increases could have been 1.8% or 1.9% to realize the same savings, or if post retirement increases, already deferred for 3 years after retirement, could have been deferred 3 1/2 years, and whether those methods would have been less of an impairment than the detriment dealt directly to employees.); Simpson v. North Carolina Local Government Employees’ Retirement System, 363 S.E.2d 90 (N.C.App. 1987), affirmed, 372 S.E.2d 559 (N.C. 1988) (A change made to correct an inequity in a retirement system—where the possibility of disability retirement appeared to be a device by which people were able to improve their retirement allowance—was not reasonable and necessary to serve an important interest when it affected vested participants who had not taken disability retirement before the changes to the disability program were made.); Marvel v. Dannemann, 490 F.Supp. 170 (D.C.Del. 1980) (Maintaining the fiscal integrity of a fund is a substantial and important purpose. The absence of fiscal integrity in a pension plan seriously undermines a central purpose—attracting and retaining qualified employees. But where the government does not suggest that its plan has been unable to meet its obligations in the past or that it is likely to be unable to do so in the future, and that funding would not be forthcoming from another source, amendments may not been seen as intended to increase the fiscal integrity of the fund but will rather be seen as providing that public funds bear substantially less of the costs, and that employees pay a correspondingly greater proportion of costs. That kind of thing may be a wise decision as a matter of policy, and it is certainly one which a government is free to implement with respect to new employees to whom it has no existing contract obligations, but a government is not entitled to implement that policy through the abrogation of contract rights in the absence of any showing that circumstances have substantially changed or that its finances are in a precarious state.).