plaintiffs memorandum in opposition...
TRANSCRIPT
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
Howard Swanson, Lambert Niesen, Steven Bornus, Richard Maus, James R. Otto, and William H. Kuretsky,
Plaintiffs,
vs.
State of Minnesota , Public Employees’ Retirement Association of Minnesota, Minnesota State Retirement System, Teachers Retirement Association of Minnesota, Governor Tim Pawlenty (in his official capacity), Thomas L. Marshall (in his official capacity), Mary Most Vanek (in her official capacity), Mary Brenner (in her official capacity), David Bergstrom (in his official capacity), Martha Lee Zins (in her official capacity), and Laurie Fiori Hacking (in her official capacity),
Defendants.
Court File No. 62-CV-10-5285
The Honorable Gregg A. Johnson Case Type: 14 Other Civil
PLAINTIFFS’ MEMORANDUM IN OPPOSITION TO
DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
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TABLE OF CONTENTS
TABLE OF CONTENTS ................................................................................................................ i
TABLE OF AUTHORITIES .......................................................................................................... ii
Statement of the Issues .....................................................................................................................1
STATEMENT OF ADDITIONAL RECORD FOR MOTION .......................................................2
STATEMENT REGARDING UNDISPUTED AND DISPUTED FACTS ....................................2
I. INTRODUCTION. ..............................................................................................................4
II. PROCEDURAL HISTORY. ................................................................................................9
III. FACTUAL BACKGROUND ............................................................................................10
A. General Background Regarding Public Pensions ..................................................10
1. Types of Pensions ......................................................................................10
2. Determining Initial Pension Benefits and Providing Increases in Public Pension Defined Benefit Plans ...................................................................12 3. Determining and Evaluating the Plans’ Funding .......................................13
B. The Retirement Systems’ Postretirement Adjustments .........................................14
1. Applicable Principles from the LCPR Principles of Pension Policy .........14
2. The Statutory Underpinnings of the Postretirement Adjustments .............15
3. The Postretirement Adjustment Formulas from 1992 through 2009 .........16
4. The Retirement Systems’ Communications with its Members Regarding the Postretirement Adjustments .................................................................17 C. The 2009 and 2010 Pension Legislation ................................................................18
1. The 2009 Pension Legislation ....................................................................18
2. The 2010 Pension Legislation ....................................................................19
a. Impact of Reduction on the Retirees’ Pension Benefits ................20
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b. Events Preceding Passage of the 2010 Legislation ........................21
IV. LEGAL ARGUMENT .......................................................................................................24
A. Legal Standards ......................................................................................................24
B. If Defendants’ Motion Is Not Denied On The Current Record, The Court Should Stay Disposition Of The Motion To Allow Plaintiffs To Engage in Discovery. ..............................................................................................................25 C. Even Based On This Limited Record, Defendants Have Failed To Establish As A Matter of Law That The 2009 And 2010 Pension Legislation Do Not Violate The Contract Clauses Of The United States And Minnesota Constitutions ..........................................................................................................27 1. The Contract Clauses of the United States and Minnesota Constitutions Protect Contractual Relationships Like Those at Issue Here .................... 27 2. Previous Legislatures had the Power to Bind Future Ones with regard to Pension Obligations. ..................................................................................28 3. Retirees have a Contractual Right to Receive Postretirement Adjustments Pursuant to the Statutory Formula in Effect at the Time of Retirement. ...................................................................................30 a. The statutory language provides no discretion in the payment of postretirement benefits. .................................................................30 b. Where the statutory language providing a monetary retirement benefit is mandatory, Minnesota’s courts have found that a contract exists ............................................................................... 33 c. Defendants’ representations and conduct in implementing the postretirement adjustments are consistent with plaintiffs’ interpretation of the statutes .......................................................... 37 4. Questions of Fact Exist Whether the 2009 and 2010 Pension Legislation Substantially Impair the Rights of Retirees to Receive Future Postretirement Adjustments Pursuant to the Formula in Effect Upon their Retirements. .......................................................................................40 5. Questions of Fact Exist Whether the 2009 and 2010 Pension Legislation is “reasonable and necessary to serve an important public purpose” .......43
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D. Defendants have Failed to Establish as a Matter of Law that the 2010 Pension Legislation Does Not Violate The Takings Clauses Of The United States and Minnesota Constitutions. .......................................................................................49 1. The Takings Clauses of the United States and Minnesota Constitutions. .49 2. Retirees have a Protected Property Interest in the Postretirement Adjustment Formula in Effect at the Time of their Retirement. ................50 E. Plaintiffs May Bring Claims Under 42 U.S.C. § 1983 Against The Individual Defendants For Injunctive Relief and Obtain Monetary Damages Against The Defendants Through A Direct Action Under The Federal Takings Clause. ..........54 F. Defendants’ Challenges to Plaintiffs’ Class Action Allegations Are Premature and Without Merit ..................................................................................................55 V. CONCLUSION ........................................................................................................................58
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TABLE OF AUTHORITIES
Cases
AFL-CIO v. Sundquist, 338 N.W.2d 560 (Minn. 1983) .......................................................... 37, 40
AFSCME v. City of Benton, Arkansas, 513 F.3d 874 (8th Cir. 2008) .......................................... 47
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978) ......................................... 27, 44, 47
Alsbrook v. City of Maumelle, 194 F.3d 999 (8th Cir. 1999) ....................................................... 54
Ario v. Metropolitan Airports Comm’n, 367 N.W.2d 509 (Minn. 1985) ..................................... 56
Arkansas Day Care Ass'n, Inc. v. Clinton, 577 F.Supp. 388 (D. Ark. 1983) ............................... 54
Ass’n of Surrogates & Supreme Court Reporters v. State of New York, 940 F.2d 766 (2d Cir. 1991)...................................................................................................... 44
Bailey v. State, 500 S.E.2d 54 (N.C. 1998) ................................................................................... 42
Booth v. Sims, 456 S.E.2d 167 (W. Va. 1995) ................................................................. 29, 36, 42
Branch v. U.S., 69 F.3d 1571 (Fed. Cir. 1995) ............................................................................. 52
Brayton, et al v. Pawlenty, et al., File No. 62-CV-09-1163 (Ramsey County District Court) ........................................................ 8
Burks v. Teasdale, 603 F.2d 59 (8th Cir. 1979) ............................................................................ 54
Carlstrom v. State, 694 P.2d 1 (Wash. 1985) ............................................................................... 46
Christensen v. Minneapolis Municipal Employees Ret. Board, 331 N.W.2d 740 (Minn. 1983)........................................................................................... passim
Commonwealth Edison v. U.S., 46 Fed.Cl. 29 (Fed. Cl. 2000) .............................................. 52, 53
Continental Illinois Nat. Bank and Trust of Chicago v. State of Washington, 696 F.2d 692 (9th Cir. 1983) .................................................................................................... 47
DLH, Inc. v. Russ, 566 N.W.2d 60 (Minn. 1997) ......................................................................... 24
Donnay v. Boulware, 275 Minn. 37, 144 N.W.2d 711 (1966) ...................................................... 24
Donohue v. Paterson, 2010 WL 2178749 (N.D. N.Y. May 12, 2010) ........................................ 42
Dougherty v. Dougherty, 950 A.2d 592 (Conn. App. 2008) ........................................................ 32
Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400 (1983) ..................... 43
Florida Rock Industries v. United States, 18 F.3d 1560 (Fed.Cir.1994) ...................................... 50
v
Glen Lewy 1990 Trust v. Investment Advisors, Inc., 650 N.W.2d 445 (Minn. Ct. App. 2002) ............................................................................. 56, 57
Hartung v. Billmeier, 66 N.W.2d 784 (Minn. 1954) .............................................................. 34, 35
Honeywell, Inc. v. Minn. Life and Health Ins. Guar. Assoc., 110 F.3d 547 (8th Cir. 1997) .................................................................................................... 28
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999) ............................................................... 10
In re Eilbert, 162 F.3d 523 (8th Cir. 1998) ................................................................................... 29
Jacobsen v. Anheuser-Busch, Inc., 392 N.W.2d 868 (Minn. 1986) ........................................ 28, 43
Johnson v. City of Minnesota, 667 N.W.2d 109 (Minn. 2003) ..................................................... 50
Koster v. City of Davenport, Iowa, 183 F.3d 762 (8th Cir. 1999) ................................................ 28
Lingle v. Chevron U.S.A., Inc. 544 U.S. 528 (2005)..................................................................... 50
Manning v. N.M. Energy, Minerals & Natural Resources Dept., 144 P.3d 87 (N.M. 2006) .......................................................................................................... 54
Massachusetts Community College Council v. Commonwealth, 649 N.E.2d 708 (Mass. 1995) ................................................................................................... 41
Minnesota Education Association v. State, 282 N.W.2d 915 (Minn. 1979) ................................. 30
Murray v. City of Charleston, 96 U.S. 432 (1887) ....................................................................... 29
N.J. v. Wilson, 7 Cranch 164 (1812) ............................................................................................. 29
Nicholson v. United States, 77 Fed.Cl. 605 (Fed. Cl. 2007) ......................................................... 53
Offerdahl v. Univ. of Minn.Hosps, & Clinics, 426 N.W.2d 425 (Minn.1988) ............................. 24
Opinion of Justices (Furlough), 609 A.2d 1204 (N.H. 1992) ....................................................... 48
Palazzolo v. Rhode Island, 533 U.S. 606 (2001) .......................................................................... 49
Parella v. Retirement Bd. of Rhode Island Employees’ Retirement System, 173 F.3d 46 (1st Cir. 1999) ................................................................................................. 28, 51
Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978) ........................................ 49, 50
Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998) .................................................. 51
Pasadena Police Officers Association v. City of Pasadena, 147 Cal.App.3d 695 (1983) ................................................................................................ 37, 42
Police Pension and Relief Board of the City and County of Denver v. McPhail, 338 P.2d 694 (Colo. 1959) ........................................................................................................ 36
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Professional Firefighters Ass’n of Omaha, Local 385 v. City of Omaha, 2010 WL 2426466 (D. Neb. June 10, 2010) ....................................................................... 47, 51
Rathbun v. W.T. Grant Co., 219 N.W.2d 641 (Minn. 1974) ........................................................ 58
Rice v. Perl, 320 N.W.2d 407 (Minn. 1982) ................................................................................. 25
Smith v. United HealthCare, 2002 WL 192565 (D.Minn. Feb. 5, 2002) ..................................... 57
Smith, et al., v. Woodwind Homes, Inc., 605 N.W.2d 418 (Minn. Ct. App. 2000) ................. 24, 25
State ex rel. Cannon v. Moran, 331 N.W.2d 369 (1983) .............................................................. 42
State ex rel. Humphrey v. Philip Morris Inc., 551 N.W.2d 490 (Minn. 1996) ............................. 33
State v. Great Northern Railway, Co., 106 Minn. 303 (1908) ...................................................... 30
Streich v. American Family Mut. Ins. Co., 399 N.W.2d 210 (Minn. Ct. App. 1987) ................... 56
Sylvestre v. Minnesota, 214 N.W.2d 658 (Minn. 1973) ........................................................ passim
U.S. Trust Co. v. N.J., 431 U.S. 1 (1977)............................................................................... passim
U.S. v. Clarke, 445 U.S. 253 (1980) ............................................................................................. 54
U.S. v. Sperry Corp., 493 U.S. 52 (1989) ..................................................................................... 52
United Firefighters of Los Angeles City v. City of Los Angeles, 210 Cal.App.3d 1095 (1989) .............................................................................................. 37, 41
United States v. General Motors Corp., 323 U.S. 373 (1945) ...................................................... 50
Univ. of Hawaii Professional Assembly v. Cayetano, 183 F.3d 1096 (9th Cir. 1999) ................. 42
Vieths v. Thorp Finance Co., 232 N.W.2d 776 (Minn. 1975) ...................................................... 25
Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980) ........................................ 51
Wensmann Realty v. City of Eagan, Inc., 734 N.W.2d 623 (Minn. 2007) .................................... 49
Westling v. County of Mills Lake, 581 N.W.2d 815 (Minn. 1998) ............................................... 49
White Motor Corp. v. Malone, 599 F.2d 283 (8th Cir. 1979) ....................................................... 44
Will v. Michigan Dep’t of State Police, 491 U.S. 58 (1989) ......................................................... 54
Constitutional Provisions
Minn. Const. art. I, § 11 .................................................................................................................. 6
Minn. Const. art. I, § 13 .................................................................................................................. 7
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U.S. Const. art. I, § 10............................................................................................................... 6, 27
U.S. Const. Amend. V .................................................................................................................... 7
Statutes
1980 Minn. Laws, ch. 342, § 22 ................................................................................................... 35
1984 Minn. Laws, ch. 564, § 51 ................................................................................................... 37
1992 Minn. Laws 530, §§ 1-2 (effective July 1, 1992) ................................................................. 16
1997 Minn. Laws, ch. 233, art I .................................................................................................... 17
2010 Minn. Laws, ch. 359 art. 1 ................................................................................................... 20
Minn. Stat § 356.415 (2010) ......................................................................................................... 18
Minn. Stat. § 11A.18 (2008) ......................................................................................................... 16
Minn. Stat. § 352.115 .................................................................................................................... 32
Minn. Stat. § 353.29 ...................................................................................................................... 32
Minn. Stat. § 356.001, subd. 1 (2009) .......................................................................................... 15
Minn. Stat. § 356.415 .................................................................................................................... 31
Minn. Stat. § 356A.01, Subd. 21 (2009) .................................................................................... 16
Minn. Stat. § 356A.05(a) (2008) ................................................................................................... 16
Minn. Stat. § 645.08 (2009) .......................................................................................................... 33
Minn. Stat. § 645.16 ...................................................................................................................... 37
Minn.Stat. § 645.16 (2009) ........................................................................................................... 33
29 U.S.C. § 1002 ........................................................................................................................... 10
42 U.S.C. § 1983 ........................................................................................................................... 54
Other Authorities
“The Most-Cited Law Review Articles Revisited” 71 Chicago-Kent L.R. 751 (1996) ................ 50
BLACK'S LAW DICTIONARY .............................................................................................. 29, 31, 32
Charles A. Reich, "The New Property," 73 Yale L.J. 733 (1964) ................................................ 51
History of Military Pension Legislation in the United States, 12 Columbia University Press, 1900 .......................................................................................... 4
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James W. Ely Jr., “Economic Liberties and the Original Meaning of the Constitution,” 45 San Diego L.R. 673 (2008). ............................................................................................................ 27
J. Hetland & O. Adamson, 2 Minnesota Practice 588 (1970) 26
Stephen R. Bruce, Pension Claims Rights and Obligations 187 (2d ed. 1993) ............................ 32
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Statement of the Issues
1. Where the statutory language provides that Retirees are entitled to postretirement
adjustments calculated according to the formula in effect at their retirement, where the
communications of Defendants guaranteeing those adjustments are consistent with that language,
where the Defendants have the responsibility of funding their defined benefit plans, and where
some Retirees even relinquished their defined contribution accounts in exchange for annuities
that were to include the postretirement adjustments, do current Retirees have a contractual
entitlement to postretirement adjustments based on the formula (or its equivalent) in effect at the
time of their retirement?
2. Where courts have routinely found that governmental claims of “economic
necessity” do not justify impairment of a contract between citizens and the government, where
the pension funds here were not in crisis and where reasonable and feasible options were
available to address the fiscal stability of Minnesota’s pension funds, did the Minnesota
Legislature violate the Contract Clauses of the United States and Minnesota Constitutions when
it decreased or eliminated current Retirees’ postretirement adjustments based on the formula (or
its equivalent) in effect at the time of their retirement?
3. Where well-established law recognizes that a Takings Clause violation occurs if
money taken is protected by a property right, did the Minnesota Legislature violate the Takings
Clauses of the United States and Minnesota Constitutions when it decreased or eliminated
current Retirees’ postretirement adjustments based on the formula (or its equivalent) in effect at
the time of their retirement?
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4. Where well-established law recognizes that defendants can be sued in their
individual capacity when plaintiffs have sued for injunctive relief and that official-capacity
actions for prospective relief are not treated as actions against the state, did Defendants fail to
provide a basis for dismissing Plaintiffs Section 1983 claims?
5. Where a single set of government actions had a dramatic negative impact on the
postretirement adjustments to which Plaintiffs and the proposed class are entitled, and where
Plaintiffs have shown on a preliminary basis how they will meet the requirements of Minn. R.
Civ. P. 23, have Plaintiffs demonstrated the viability of this lawsuit as a class action?
6. Where no formal discovery has occurred and Plaintiffs have demonstrated that
discovery will yield material facts relevant to their claims, are Plaintiffs entitled to discovery if
the Court is not inclined to deny Defendants’ motion on the record presented?
STATEMENT OF ADDITIONAL RECORD FOR MOTION
1. Affidavit of Susan M. Coler, with Exhibits 1-25 and Summary Exhibits 1-4
2. Affidavit of Claude Poulin, with Exhibits A-B
STATEMENT REGARDING UNDISPUTED AND DISPUTED FACTS
Section III below titled “Factual Background” provides the Court with many additional
undisputed facts relevant to the issues in this case, including citations to statutory language and
to documents originating from the Defendants, as well as factual information available in the
public record.
Plaintiffs’ discussion of disputed facts is integrated into Section III and is further
discussed in Section IV, Plaintiffs’ arguments to the Court. Nonetheless, below is a listing that
includes the primary material disputed facts relevant to this motion. Citations to the factual basis
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on which Plaintiffs assert that these facts are disputed are provided in Section III, “Factual
Background.”
Disputed: Whether the Retirees are contractually entitled to postretirement adjustments based on the formula in effect (or its equivalent) at the time they retired. See § III, Disputed: Whether the 2009 and 2010 Legislation at issue here decreased benefits to which Retirees are entitled. Disputed: Whether, during the period from 1992 through 2008, the Legislature has provided compensation for possible decreases resulting from actual changes in the statutory formula by which Retirees’ monthly annuities are increased. Disputed: Whether Defendants’ communications and conduct with respect to postretirement adjustments support Retirees’ contractual entitlement to postretirement adjustments based on the formula in effect (or its equivalent) at the time they retired. Disputed: Whether the imposition of “shared sacrifice” on the Retirees is illegal. Disputed: Whether the impairment of contract imposed on the Retirees is substantial. Disputes: Whether the impairment of contract imposed on the Retirees is reasonable and necessary to serve an important public purpose. Disputed: Whether the fiscal stability of the pension funds warranted the impairment of contract imposed on the Retirees. Disputed: Whether feasible and reasonable options exist to protect and improve the fiscal stability of the pension funds without the impairment of contract imposed on the Retirees. Disputed: Whether the Retirees’ receipt of postretirement adjustments according to the formula in place at the time they retired (or its equivalent) is a property right. Disputed: Whether the Defendants’ decrease of postretirement adjustments to which Retirees are entitled constitutes a basis for injunctive relief appropriate for redress under Section 1983.
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I. INTRODUCTION
“Whether it be in the field or in the halls of the legislature it is not consonant with the American traditions of fairness and justice to change the ground rules in the middle of the game.” – Sylvestre v. Minnesota, 214 N.W.2d 658, 665 (Minn. 1973) (quotation omitted). This case concerns an enormous game changer. Plaintiffs and the Class they represent
(collectively, “Retirees”), approximately 130,000 retired Minnesota public sector employees,
were promised certain pension benefits and counted on those benefits to sustain them throughout
retirement. That promise has now been broken.
Retirees include former public school teachers who taught millions of Minnesota's
children; retired state judges who interpreted and enforced the state’s laws; retired police officers
who put themselves in harms’ way to protect Minnesota’s citizens; and other retired state, county
and local government workers who ensured the proper functioning of all sectors of Minnesota
government. Retirees are members of one of Minnesota’s three statewide public pension
systems, (collectively, “Retirement Systems”).1 Former state employees belong to the Minnesota
State Retirement System (MSRS); former local government employees belong to the Public
Employees Retirement Association of Minnesota (PERA); and most former Minnesota teachers
belong to the Teachers Retirement Association of Minnesota (TRA).
Retirees worked in public service for many years, often at a lower wage than they could
have earned in the private sector. Throughout their employment, they made mandatory
contributions to the Retirement Systems. Under Minnesota law, Retirees became vested in their
full pension benefits when they retired. These vested benefits include the right to receive
1 The public pension is not a modern construct, but is as old as ancient Rome. Caesar used a public pension to ensure that soldiers who had returned to Rome would remain faithful to the Republic. William Henry Glasson, History of Military Pension Legislation in the United States, 12 Columbia University Press, 1900 at 24-42.
5
pension increases based on the statutory postretirement adjustment formula that was in effect at
the time that they retired. Indeed, the Retirement Systems repeatedly assured Retirees that they
could count on the annual increase, and that it was “guaranteed.”
Despite these assurances, the Minnesota Legislature in 2009 and 2010 enacted
legislation (the “Pension Legislation”) that reduced Retirees’ promised pension benefits. In
2009, the legislature dramatically modified the postretirement adjustment formula by substituting
a flat 2.5% increase for the previously guaranteed inflation and investment components. In
2010, the legislature took away the guaranteed 2.5% increase and reduced the postretirement
adjustment formula to a range from 0 to 2.0%. While Defendants’ claim that the 2010
adjustments are “temporary,”2 some reductions will undoubtedly remain for a long period of
time. By doing this, the Legislature unilaterally “changed the ground rules” on Retirees, not in
the “middle of the game” while they were still employed, but after they had retired, long after the
game was over.
Prior to any discovery, and having provided only selected documents, Defendants have
now prematurely moved for summary judgment, seeking a determination that they had a right to
reduce Retirees’ pension benefits as they did. The Court should deny Defendants’ motion
outright even on this slim record because the statutory language is clear with respect to the
Retirees’ entitlement to their pension annuities including postretirement adjustments and there
are numerous disputed questions of material fact. Or the Court should take up Defendants’
motion only after the parties have had an opportunity to take the pertinent discovery.
2 See p. 38 of August 18, 2010 Memorandum of Defendants In Support Of Motion For Summary Judgment. Defendants’ Memorandum will be cited in this brief as Def. Mem. at ---.
6
To obfuscate their illegal conduct, Defendants present the Court with a lengthy
description of how pension plan fiduciaries managed pension funds over the last forty years. For
the most part, this description is irrelevant to the issues to be decided.
The bulk of the plans at issue here are defined benefit plans. Like any sponsor of a
defined benefit plan, Minnesota’s public employers accepted the risk and burden of amassing the
funds to fulfill its guarantee of a particular “benefit,” including statutorily promised annuities
with postretirement increases, to public employees upon retirement. Employees were never told
that after retirement the state could shift the risk to them. To the contrary, Retirees were assured
that their benefits were guaranteed. By cutting Retirees’ vested benefits, the State has shifted to
Retirees part of the investment risk that it promised to fully assume and until now did fully
assume. Those Retirees in defined contribution plans (e.g. the MSRS Unclassified Plan) – who
elected upon retirement to trade in their individual accounts for essentially the same monthly
benefits and statutory increases as the rest of the Retirees -- experienced an even more egregious
takeaway: the individual annuities that they essentially “purchased” from the State are now being
reduced, without any refund to them of any part of the purchase price.
The Minnesota and United States Constitutions obligate Defendants to fulfill their side of
the bargain and provide Retirees with the postretirement adjustments in effect at the time that
they retired. Specifically, Defendants have violated the Contract Clause of the U.S. Constitution,
which declares that “[n]o state shall…pass any…law impairing the obligations of contracts…”
(U.S. Const. art. I, § 10); the Contract Clause of the Minnesota Constitution, which in pertinent
part provides that no law “…impairing the obligation of contracts shall be passed…” (Minn.
Const. art. I, § 11); the Takings Clause of the United States Constitution, which states that
“private property [shall not] be taken for public use, without just compensation” (U.S. Const.
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Amend. V); and the Takings Clause of the Minnesota Constitution, which provides that “Private
property shall not be taken, destroyed or damaged for public use without just compensation”
(Minn. Const. art. I, § 13).
With respect to the 2009 Pension Legislation, Defendants have provided no facts that the
elimination of the investment component of the postretirement adjustment was necessary. With
regard to the 2010 Pension Legislation, Defendants claim that extreme exigencies justified their
actions, but Retirees will establish that the situation did not warrant the drastic action taken and
that Defendants could have taken other actions to shore up the Retirement Systems’ funding
levels without breaking their promise to Retirees. Because this issue comes before the Court on
summary judgment, however, Retirees do not need to make their case now; they need only show
that there are genuine disputed issues as to whether the situation was as dire as claimed by the
Defendants, and whether the Defendants had viable alternatives that did not involve violation of
Retirees’ vested rights. Retirees easily meet this requirement to defeat Defendants’ motion for
summary judgment.
At this stage, the Court should also reject Defendants’ arguments that the promised
postretirement adjustments are somehow separate from the vested annuity without future
adjustments, or that Retirees have a right only to those postretirement amounts that they already
have received. The plain language of the governing statutes and plan documents refutes these
arguments. However, should the Court determine that the operative language is ambiguous, it
would be obliged to examine extrinsic factual evidence concerning plan interpretation and the
conduct of plan administrators over the past two decades before deciding these issues. Plaintiffs
offer documents available to them showing that the Retirement Systems’ administrators acted in
a manner consistent with their view of the statutory language (such as documents saying the
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adjustments were “guaranteed”), but they have not had an opportunity to engage in any
affirmative discovery. This discovery should occur before any ruling.
Finally, Defendants attempt to justify the 2010 Pension Legislation by claiming that
Retirees were bound to participate in what Defendants term “shared sacrifice” for the benefit of
the pension funds that Defendants have failed to properly maintain. Defendants imply that
Retirees are somehow selfish for seeking to enforce the bargain that Defendants made and on
which Retirees relied for financial security in their retirement. Defendants fall back on this
“shared-sacrifice” equitable argument because there is no legal basis for transferring to the
Retirees any of the obligation to help shore up the funding levels of the Retirement Systems’
plans once they have started receiving benefits.
In her decision holding that the unallotment process is unconstitutional, District Court
Judge Gearin observed that government faces policy decisions that are challenging and
sometimes painful. While such decisions are not normally the business of the Court, they are if
they “…are made in a way that violates the constitution.” Order, Brayton, et al v. Pawlenty, et
al., File No. 62-CV-09-1163 (Ramsey County District Court), attached to the Affidavit of Susan
M. Coler (“Coler Aff.”) as Ex. 1 at 10.3 Here, Defendants’ decision to eliminate a portion of
promised benefits in the name of “shared sacrifice” violates both the federal and state
constitutions. Accordingly, this Court may and should step in.
In sum, while Defendants strive to distract the Court from their illegal conduct through
lengthy discussions of the tribulations faced by plan administrators and calls for “shared
sacrifice,” these points have no bearing on the fundamental question of whether the 2009 and
2010 Pension Legislation was constitutional. While that question requires resolution of a series 3 Unless otherwise indicated, all exhibits are attached to the Coler Aff. and are referenced as “Ex. --.”
9
of factual disputes, Plaintiffs have not been allowed any discovery. The Court should deny or
postpone ruling on Defendants’ summary judgment motion and allow discovery to proceed.
II. PROCEDURAL HISTORY
Plaintiffs commenced this lawsuit on May 17, 2010, two days after Governor Pawlenty
signed the 2010 Pension Legislation into law. Coler Aff. ¶ 2. Plaintiffs filed an Amended
Complaint on July 1, 2010, which Defendants answered on July 30, 2010. Id. In early
conversations among counsel, Defendants announced their intention to file a motion for
summary judgment and, at a status conference, asked the Court for the earliest possible filing
date. Coler Aff. ¶ 4. In a telephone conference held August 2, 2010, Plaintiffs’ counsel urged
Defendants to allow Plaintiffs a short but reasonable period of discovery before propounding
their motion. Id., ¶ 5. Plaintiffs provided Defendants with written citations supporting their
position. Id., Ex. 2 Defendants rejected Plaintiffs’ effort to obtain discovery and stated that
they would proceed with their motion for summary judgment. Id.,
Attempting to obtain at least minimal basic discovery as soon as possible, Plaintiffs
served Defendants with Requests for Production of Documents on August 10, 2010, Coler Aff., ¶
6, Ex. 3; responses are due September 9, 2010, two days after the September 7, 2010 due date for
this brief. Coler Aff., ¶ 6. On August 19, 2010, Plaintiffs served notices pursuant to Minn. R.
Civ. P. 30.02(f) for depositions to occur in October. Id., Ex. 4.
Meanwhile, on August 18, 2010, Defendants served their summary judgment submission;
it includes a 57-page brief, over 70 exhibits, and four affidavits; Plaintiffs had less than three
weeks – until September 7, 2010 – to respond.
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III. FACTUAL BACKGROUND A. General Background Regarding Public Pensions
1. Types of Pensions
There are two types of pension plans: defined contribution and defined benefit plans. “A
defined contribution plan is one where employees and employers may contribute to the plan, and
the employer's contribution is fixed and the employee receives whatever level of benefits the
amount contributed on his behalf will provide.” Hughes Aircraft Co. v. Jacobson, 525 U.S. 432,
439 (1999) (quotation omitted). A defined contribution plan is essentially made up of individual
accounts for plan participants; indeed, it is also called an “individual account” plan. Section
3(34) of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §
1002(34). A 401(k) plan is a typical defined contribution plan. “A defined benefit plan, on the
other hand, consists of a general pool of assets rather than individual dedicated accounts. Such a
plan, as its name implies, is one where the employee, upon retirement, is entitled to a fixed
periodic payment.” Hughes, 525 U.S. at 439 (quotation omitted). Almost all of the pension plans
in the Retirement Systems are defined benefit plans.
A critical distinction between defined contribution plans and defined benefit plans – and
a critical point in this case – concerns assumption of risk. In a 2007 report, the State of
Minnesota’s Office of Legislative Auditor explains this important point:
In defined benefit plan, the employer takes on the investment risk. Contributions made throughout the employee’s tenure are invested to pay the promised benefit. If assets are insufficient to pay the specific promised benefits, the employer assumes the market risk and generally makes up the difference. On the other hand, in defined contribution plans, the individual employee bears the investment risk. That is, the retiree’s pension income is directly affected by the investment performance of his or her pension account.
11
Ex. 5 at 4. In other words, where, as here, the operative plans involve defined benefits, the
employer is responsible for funding the plan, and bears the investment risk. Affidavit of Claude
Poulin, F.S.A., M.A.A.A., E.A., (“Poulin Aff.”), ¶ 14. In contrast, defined contribution plans
like 401(k)’s are never “underfunded” as participants simply receive the sum of their
contributions, the employer match (if applicable), and the gains (or losses) resulting from their
investment strategy.
As have other states, Minnesota funds its defined benefit plans through a combination of
statutorily determined contributions by both the employing public entity and by current
employees. See e.g., for MSRS: Minn. Stat. 352.021, subd. 2 (2009) (“Every person who
becomes a state employee . . . is covered by the general state employees retirement plan.
Acceptance of state employment or continuance in state service is deemed to be consent to have
deductions made from salary for deposit to the credit of the account of the state employee in the
retirement fund.”); Minn. Stat. § 352.04, subd. 1 (2009) (creating retirement fund where
employee contributions, employer contributions, and other amounts authorized by law must be
deposited); id. , subds. 2-3 (articulating the amount of employee and employer contributions as a
percent of salary).
“Nearly all employees of state and local government are required to make contributions
to defray the cost of their retirement benefit.” Ex. 6 at 8 (Keith Brainard, “Public Fund Survey
Summary of Findings for FY 2008,” NASRA). Contribution rates for employees and many
employers are set as a fixed percentage of pay. About one-fourth of state and local governments
do not participate in Social Security. Contribution rates in those “non-coordinated” plans are
higher, “because benefits usually also are higher to offset the lack of Social Security.” Id.
12
In 2008, before many states raised their contribution rates, the nationwide median
employer contribution rate for workers who participate in Social Security was 8.7%. Id. The
employer contributions in 2008 for many “coordinated” plans in the Midwest and the Plains
states far exceeded the national median: Arkansas PERS – 12.54%; Idaho PERS – 10.39%;
Illinois SERS – 16.56%; Missouri SERS - 12.75%; Oklahoma PERS – 12.46%. Ex. 7 at 22-23
(“2008 Comparative Study of Major Public Employee Retirement Systems,” Wisconsin
Legislative Council (revised May 2010)).
2. Determining Initial Pension Benefits and Providing Increases in Public Pension Defined Benefit Plans
Employees enrolled in defined benefit plans begin receiving pension benefits once they
meet the particular plan’s eligibility requirements and terminate their employment. Typically,
and here, a retiree’s base benefit is calculated by multiplying a formula multiplier by the
employee’s salary and by the number of service years. For example, the current MSRS
Coordinated Plan formula for a person at normal retirement at age 65 is [1.7%] x [average
compensation] x [years of service]. Bergstrom Ex. 23 at 30.4 Thus, an employee who retires
after 20 years of service and whose average compensation is $36,000 would receive a base
benefit of $1,020 per month or $12,240 a year. Compared to most other state pension system,
the Retirement Systems’ initial payment level is low.5 Ex. 5 at 72-73; Ex. 7 at 26, 28-29.
4 The Bergstrom, Hacking, Klausing and Vanek Exhibits were attached to their affidavits filed with Defendants’ Memorandum. 5 In a 2007 report, the State of Minnesota’s Office of Legislative Auditor found that Minnesota’s lower initial pension benefits resulted from the use of a lower benefit multiplier, the manner in which an employee’s “average salary” is determined, larger reductions for those who retire before age 65, and because “Minnesota is one of 10 states that does not exempt pension income from state income taxes.” Ex. 5 at 70-73; see Ex. 6 at 32, 34-35.
13
Nearly all major public pension systems in the United States provide some form of
periodic pension increase to compensate retirees for the anticipated effects of inflation. These
increases can be in one of several forms, including a fixed annual percentage increase, an
increase tied to the Consumer Price Index (usually with a cap), an increase based on investment
returns beyond a designated level, or an increase enacted by the state legislature. Compared to
most other state pension systems (at least since 2002), Minnesota has been providing less in
postretirement adjustments to retirees.6 Ex. 5 at 7; p. 7; Ex.7 at 32, 34-35.
3. Determining and Evaluating the Plans’ Funding
It is common practice for trustees of public pension plans to determine annually whether
plan assets are sufficient to meet plan obligations. This occurs by instructing an actuary to
produce an “actuarial valuation” that estimates the plan’s position at a specific point in time.
Actuarial projections are based on two types of assumptions – economic and demographic.
Economic assumptions include assumptions as to investment returns, which are used to
determine the present value of future liabilities, and assumptions as to salary increases, used to
project current pay until retirement. Demographic assumptions include the likelihood of retirees’
termination of employment, retirement, disability or death at any particular point in time. Ex. 8
at 1 (“Actuarial Valuation Basics,” Massachusetts Public Employee Administration Commission
(2008)).
There are two methods of plan asset valuation. The “Market Value of Assets” (MVA)
method represents a “snap shot” of the value of the plan on a particular day and is calculated by
determining the present value of future expected cash flows, discounted by the market rate of 6 The Legislative Auditor found that of the 42 pension systems providing for automatic increases, 24 had more generous postretirement benefit increase formulas, 10 had the same or equivalent formulas, and 8 had generally lower formulas than Minnesota’s post-retirement formula. Ex. 5 at 73.
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investment return. Use of the MVA does not take into account short-term market fluctuations,
and may make it difficult to value fund assets on a consistent basis. To alleviate this problem
and reduce the impact of short-term asset volatility, actuaries calculate the plan’s “Actuarial
Value of Assets” (AVA) which “smoothes” the investment returns over a period of time, usually
up to five years. Thus, when the returns are higher than assumed, smoothing defers gains in the
AVA. When the returns are less than assumed, smoothing defers losses in the AVA. Ex. 9 at 8
(“Montana Municipal Police Officers’ Retirement System June 30, 2009 Actuarial Valuation”).
Pension Plans do not have to be fully funded to be actuarially sound. Many experts
consider AVA ratios above 80% as sound for public pensions. Ex. 10 at 15 (GAO, “State and
Local Government Retiree Benefits – Current Funded Status of Pension and Health Benefits”).
MVA ratios are informative but a lower MVA “doesn’t fully disclose the long-term funding
trend of the System,” according to Milliman, the actuary for Minnesota’s Legislative Committee
on Pensions and Retirement. Klausing Aff., Ex. 1 at 5 (July 1, 2009 Actuarial Review of the
Retirement Systems).
B. The Retirement Systems’ Postretirement Adjustments
1. Applicable Principles from the LCPR Principles of Pension Policy
Since 1955, the Legislative Commission on Pensions and Retirement (“LCPR”) has had
in place a set of “Principles of Pension Policy” to be used “as the basis for evaluating proposed
public pension legislation.” Klausing, Ex. 6 at 5-8. As the LCPR recognizes, “[p]roblems can
be avoided or minimized if a sound set of principles is used as a guideline in developing the
various public pension funds and plans.” Id. at 5.
With respect to postretirement benefits and how the Legislature should address funding
shortfalls, the Principles state:
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• “Postretirement benefit adequacy should function to replace the impact of economic inflation over time in order to maintain a retirement benefit that was adequate at the time of retirement.”
• “In recommending benefit plan modifications, the imposition of reductions in overall
benefit coverage for existing pension plan members should not be recommended.” • “The imposition of a reduction in overall benefit coverage may be imposed for new
pension plan members in order to achieve sound pension policy goals.”
• “A reduction in some aspect or aspects of benefit coverage may be recommended in combination with a proposed benefit increase or benefit increases in implementing sound pension policy goals.”
Id. at 5-6 (emph. added).
2. The Statutory Underpinnings of the Postretirement Adjustments
The Minnesota Legislature has provided Retirees with an initial pension annuity and
postretirement adjustments to that annuity by statute. See Summary Exhibits (“S. Ex.”) 1-4
(providing relevant statutory citations from 1992-2010). The statutory language states that
Retirees are “entitled” to both an annuity and an annual adjustment to that annuity that is made
“automatically.” Id. The statutes further articulate in mandatory terms the formulas by which
both the annuity and the adjustments “must” or “shall” be determined. Id. To avoid unnecessary
duplication, a detailed analysis of the statutory language of the pension annuities postretirement
adjustments is provided in the Argument below at § IV.C.3.a.
The Legislature has further declared that the public pension plans exist for the “exclusive
benefit” of members and beneficiaries. They were created “to provide for the retirement of their
members and to provide funds for the beneficiaries of members in the event of death of a
member.” Minn. Stat. § 356.001, subd. 1 (2009). The exclusivity of the benefit is clear: “no part
of the moneys of the plans and funds may revert to the plan or fund or be used for or diverted to
purposes other than the exclusive benefit of the members or their beneficiaries.” Id.
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Accordingly, the Legislature assigned the plan fiduciaries the duty to provide authorized
benefits to plan participants and beneficiaries, incur and pay administrative expenses, and
“manage a covered pension plan in accordance with the purposes and intent of the plan
document.” Minn. Stat. § 356A.05(a) (2008). To this end, the fiduciaries are obligated by
statute to carry out their duties “in a manner consistent with law and the plan document.” 7 Id. at
(b) (emphasis added; italicized phrase omitted in Def. Mem. at 8).
3. The Postretirement Adjustment Formulas from 1992 through 2009
In 1992, the Legislature enacted a formula for postretirement adjustments that provided a
benefit designed to both (1) compensate for the effects of inflation (the inflation-adjustment
component) and (2) allow retirees to share in any earnings (the investment-based component).
See 1992 Minn. Laws 530, §§ 1-2 (effective July 1, 1992). That two-component formula
remained in place through 2009.
Initially, the inflation-adjustment component provided for an increase in annual benefits
equal to 100% of the inflation rate as measured by the Consumer Price Index (“CPI-W”) up to a
maximum of 3.5%. Id. The separate investment-based component would be paid only if
investment returns, averaged over a five-year period, exceeded the amount needed to pay: (1) the
inflation-based component (2.5% maximum), and (2) the 5% annual actuarial earnings
assumption. In addition, all accumulated investment losses from prior periods were required to
be recovered before the investment-based portion of this calculation was to be paid. Minn. Stat.
§ 11A.18 (2008). In 1997, the inflation-adjustment component was decreased from 3.5% to 7 Plan documents are defined by statute as “a written document or series of documents containing the eligibility requirements and entitlement provisions constituting the benefit coverage of a pension plan, including any articles of incorporation, bylaws, governing body rules and policies, municipal charter provisions, municipal ordinance provisions, or general or special state law.” Minn. Stat. § 356A.01, Subd. 21 (2009).
17
2.5%, and the actuarial earnings assumption was increased from 5 to 6%. Consistent with the
“Principles of Pension Policy” stating that any reduction should be in combination with a
proposed benefit increase, the Legislature implemented a permanent one-time increase designed
to be “actuarially equivalent” to the previous statutory formula. See 1997 Minn. Laws, ch. 233,
art I, §§ 5, 58, 72.
Retirees received postretirement adjustments including both components through 2002,
but after that received only the inflation-adjustment component because the funds did not have
sufficient returns to meet the formula requirements allowing payment of the investment-based
component. Bergstrom Ex. 8 at 13. (April 20, 2007 Memo to Post Fund Committee from the
Retirement Systems’ Executive Directors).
4. The Retirement Systems’ Communications with its Members Regarding the Postretirement Adjustments
Because Plaintiffs have not obtained any discovery from Defendants, they have not yet
performed a systematic or comprehensive review of communications from the Retirement
Systems to public employees and retirees concerning the postretirement adjustments. Relevant
documents that Plaintiffs have obtained independently suggest that the Retirement Systems
regularly assured employees and Retirees that they could count on continuing to receive their
promised postretirement adjustments under the 1992/1997 two-component formula throughout
retirement.
For example, in brochures provided to members, PERA referred to the investment-based
adjustment as the “Permanent Investment Component” and to the inflation-based adjustment as
the “Permanent Inflation Component.” Ex. 11 (“Increases in Your PERA Pension,” January
2004). That same brochure described the inflation-adjustment component as “a permanent
feature . . . It is paid regardless of investment gains or losses experienced by the Post Fund.” Id.
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Likewise, on the back cover of a 1991 handbook for police and fire members, PERA stated that
“benefits are based on the laws in effect at the time you terminate your public service.” Ex. 12
(“Your Benefits With PERA,” November 1991). Similarly, in a 2005 letter, Defendant and
MSRS Executive Director Bergstrom informed a retiree: “Our increase is based on two
components. The inflation component guarantees that we increase benefits based on the
Consumer Price Index (CPI) up to 2.5 percent.” Ex. 13 (February 2, 2005 Bergstrom Letter to
James Otto). See also, Ex. 14 (“Minnesota Post Retirement Investment Fund,” November 1999
TRA Pamphlet) (“The cost-of-living component is paid up to a maximum of 2.5 percent . . . It is
paid each year regardless of the amount of investment return.”).
In addition, the selected documents that Defendants filed with their motion include
several that describe the postretirement adjustments as “guaranteed” or words to that effect. See
e.g., Bergstrom Ex. 4 at 3 (January 25, 2007 Post Fund Minutes referencing “the current
guaranteed 2.5% cost of living adjustment”); Vanek Ex. 1 at 11 (December 5, 2006 Memo from
Executive Directors of Retirement Systems to Boards of Directors, noting that the 8.5 percent
return assumed by the Post Fund is required “to cover the guaranteed inflation based annual
adjustment”); Hacking Ex. 7 at 1 (January 2007 Post Fund Q&A, noting that “each year” the
inflation-based adjustment “is granted regardless of investment performance”).
C. The 2009 and 2010 Pension Legislation
1. The 2009 Pension Legislation
In 2009, as part of the legislation abolishing the Minnesota Post Retirement Investment
Fund (“Post Fund”), the dual-component formula was eliminated and replaced with a 2.5%
annual increase. 2009 Minn. Laws, Ch. 191 (codified at Minn. Stat § 356.415 (2010)). The
2.5% annual increase was applied on January 1, 2010 to all retired members of the Retirement
19
Systems, regardless of date of retirement. Klausing Ex. 18 at 3 (Minnesota State Board of
Investment 2009 Annual Report).
Plaintiffs are not aware of any analysis undertaken by Defendants of whether the flat
2.5% increase constituted a decrease in the postretirement adjustment over time as compared to
the previous formula – CPI capped at 2.5% plus the potential investment component. It is
apparent that the Retirement Systems viewed awarding the CPI capped at 2.5% as the actuarial
equivalent of a 2.5% flat increase. Bergstrom Aff., Ex. 26 at 8 (Post Fund Proposal – 2008
Legislative Session) (“2.5 percent annual increase is built into the current actuarial funding
structure”). However, the 2009 legislation does appear to be a reduction over time because of
the complete elimination of the investment component that had provided substantial increases in
past years. See Bergstrom Ex. 2 at 3 (MSRS Messenger (newsletter), Spring 2007, showing
increases from 1997 through 2007 ranging from .07% to 11%). Plaintiffs are unable to
determine without additional discovery whether the 2009 modification in fact compensates the
Retirees for projected losses they will incur as a result of the change, but it appears that, as a
result of the 2009 change, the Retirees lost the investment component and received nothing in
return.
2. The 2010 Pension Legislation
In 2010, the Minnesota Legislature changed the postretirement adjustment formula again.
The formulas were individual to the Retirement Systems, but uniformly constituted reductions in
the postretirement adjustment that had been passed in 2009.
MSRS – for all plans (except State Patrol), reducing the automatic postretirement increase from 2.5% to 2.0% and for State Patrol Plan, reducing the automatic postretirement increase from 2.5% to 1,5% until the funding of the plan reaches 90% (MVA) when it will return to 2.5%.
20
PERA – for the General Plan and Local Government Correctional Service Plan, reducing the automatic postretirement increase from 2.5% to 1.0% until the funding of the plan reaches 90% (MVA) when it will return to 2.5%; for the Police and Fire Plan, reducing the automatic postretirement adjustment from 2.5% to 1.0% for 2011 and 2012 and then increase it to CPI with a cap of 1.5% until the funding of the plan reaches 90% (MVA) when it will return to 2.5%. TRA – suspending the automatic postretirement increase for two years and then reducing the automatic postretirement increase from 2.5% to 2.0% until the funding of the plan reaches 90% (MVA) when it will return to 2.5%
2010 Minn. Laws, ch. 359 art. 1, §§76-81 (“2010 Pension Legislation”). a. Impact of Reduction on the Retirees’ Pension Benefits. TRA’s actuary believes that – even with the 2010 Pension Legislation – the TRA funding
level will not be restored to 90% at any time during the next 35 years. Hacking Ex. 12 at 4
(March 16, 2010 Memorandum from Hacking to House Committee). From the documents filed
with this motion, Plaintiffs have not been able to identify similar information for the other funds.
If it is assumed that most of the other funds will be below 90% MVA for at least 25 years,
Plaintiffs estimate that retirees of the following plans will receive the following percentage
reductions in benefits over that time: MSRS (except for State Patrol Plan) - 7% less; MSRS State
Patrol Plan – 13.3%; PERA General Plan - 19.2%; and PERA Police and Fire Plan - 14.2%.
Coler Aff. at ¶¶ 9-10. Plaintiffs further estimate that TRA retirees, who will also receive no
adjustments in 2011 and 2012, will see their benefits reduced by 10.5% over the next twenty-five
years.Id. This translates into the loss of at least tens of thousands of dollars for retirees with
relatively few years of service8 and up to several hundred thousands of dollars for retirees with
8 For the “hypothetical” retiree who retired in 2009 and received the average benefit for new retirees with at least 10 years of service, the retiree’s benefits will be reduced by the following over the next 25 years: MSRS State Employees Plan -- $22,487; MSRS State Patrol Plan -- $124,374; PERA General Plan -- $40,470; PERA Police & Fire Plan -- $98,576; and TRA Plan -- $42,254. Coler Aff. at ¶ 11.
21
over 30 years of service.9 It does not appear from the documents submitted by Defendants that
the Pension Boards, the LCPR or the Legislature were provided or considered calculations of this
type during their deliberations.
b. Events Preceding Passage of the 2010 Legislation In late summer of 2009, Mercer – the Retirement Systems’ actuary – provided each of the
Plan Boards with preliminary reports of the July 1, 2009 Actuarial Valuations for their respective
Plans. These reports included the AVA and MVA ratios for several of the larger funds in the
Retirement Systems as summarized in the table below:
Pension System
Plan Name July 1, 2008 AVA
July 1, 2009 AVA
July 1, 2008 MVA
July 1, 2008 MVA
MSRS State Employees Retirement Fund
90.18% 85.9% 85.79% 65.61%
MSRS State Patrol Fund 85.79% 80.58% 84.96% 62.05% PERA Public
Employees Retirement Fund
73.60% 69.99% 72.03% 53.81%
PERA Public Employees Police & Fire Fund
88.42% 83.22% 86.36% 63.55%
TRA TRA Fund 81.99% 77.36% 81.45% 59.76% Vanek Ex. 10 at 2 (2009 Public Employees Retirement Fund Valuation); Bergstrom Ex. 23 at 2
(2009 State Employees Retirement Fund Valuation); Hacking Ex. 13 at 2 (2009 TRA Valuation);
Ex. 15 at 2 (PERA – P&F 2009 Actuarial Evaluation); Ex. 16 at 2 (2009 State Patrol Fund
Valuation).
9 For the “hypothetical” retiree who retired in 2009 and received the average benefit for new retirees with at least 30 years of service, the retiree’s benefits will be reduced by the following over the next 25 years: MSRS State Employees Plan -- $75,793; MSRS State Patrol Plan -- $232,754; PERA General Plan -- $216,619; PERA Police & Fire Plan -- $384,841; and TRA Plan -- $165,341. Coler Aff. at ¶ 12.
22
Shortly after receiving the actuarial valuations, the Boards decided to take immediate
action with respect to funding levels and moved quickly to the “solution” of cutting benefits of
current retirees by lowering the postretirement adjustment formula. For example, at their
September 2009 meeting, TRA Board members were already talking about a “shared sacrifice”
approach. Hacking Ex. 10 at 1 (November 6, 2009 TRA Board Minutes). Similarly, even
before their actuaries provided them with models for reducing the postretirement increases, the
PERA Board voted at its October 2009 meeting to cut the benefits to the current retirees. Vanek
Ex. 6 at 5 (October 8, 2009 PERA Board Minutes).
At the same time, the Retirement Systems reported to their constituents that the pension
funds were not in a crisis situation. See e.g., Hacking Ex. 7 at Ex. 3A-5 at 4 (October 2009 Q &
A – Q: Is there a risk that TRA will not be able to pay monthly benefits?" A: "No, not for many
years. There is no imminent danger threatening benefit payments."); Vanek Ex. 12 at 1 (Autumn
2009 "The PERA Benefit" (newsletter) – "With assets of over $14 billion for all our plans,
current benefits are not in jeopardy--the problems that must be addressed lie in the future.")
During the period that the 2010 Legislation was being considered, the State Board of
Investment reported excellent investment returns in the Retirement Systems’ jointly-managed
defined benefit plans. See Ex. 17 (SBI December 14, 2009 and February 14, 2010 Minutes, SBI
Combined Funds Performance, 3/3/10). MSRS acknowledges on its website that since “June 30,
2009, the Plan has experienced significant recovery with strong investment gains of about 15
percent . . . [that] have helped stabilize the funding and the Plan is now over 70 percent funded.”
Ex. 18 (MSRS Web Page).
During their formulation of their final proposals to the Legislature, the Pension Boards
were also provided with information about changes that other states had recently enacted or were
23
considering to shore up their pension plans. See, e.g.,Vanek Ex. 10 at 3 (December 2009 “Public
Employees Retirement Fund Actuarial Valuation Report as of July 1, 2009”). Options that the
Pension Boards were aware of but rejected included lowering benefit levels for new hires or
raising employer or employee contribution rates to levels on par with most other states, or even
to their own historical levels.
For example, documents show that the MSRS Board summarily rejected options
involving increased employer and current employee contributions due to the recent history of
State budget cuts. In discussing why MSRS was not recommending an increase to contribution
rates for the MSRS General and Correctional Plans, MSRS Executive Director Bergstrom stated
in a March 2010 memo to the Legislature:
The employees and employers have already been asked to increase contribution rates over the past years. Asking employees to shoulder an additional burden when they have not received, nor are likely to receive, salary increases was not a viable alternative. The serious deficits facing the State of Minnesota, and specifically state agencies, make it unpalatable to increase employer contributions.
Bergstrom, Ex. 22 at 2 (March 13, 2010 Bergstrom Memorandum to Rep. Pewlowski) (emphasis
added);10 see also Vanek Ex. 8 at 4 (December 10, 2009 Minutes of PERA Board of Trustees in
which a trustee stated that COLA should be suspended because “actives are not getting a wage
increase, they are paying more for insurance and in some cases are being furloughed”).
In this context, the “shared sacrifice” model cutting current retiree benefits provided a
seemingly easy new “option” that was hastily proposed and adopted by the Legislature. This
lack of consideration and the abbreviated process may be contrasted to another component of the
2010 Legislation that mandated the Retirement Systems to undertake a year-long process to
10 Bergstrom is referring to the increase of the employer and employee contributions from 4% to 5% over the past four years. Bergstrom, Ex. 22 at 2.
24
study the long-term health of their pension plans. See 2010 Laws, ch. 359, art. I, § 86. The
Retirement Systems have published a proposed approach to undertake this study, which includes
a study, actuarial analysis conducted by the Retirement Systems’ actuary and reviewed by the
LCPR actuary, solicitation of input from “stakeholder groups and other interested parties, and
publication of a draft report that will be circulated to all groups and interested parties for
comment before a final report is issued. Ex. 19 (Retirement Systems Proposed Design Study).
IV. LEGAL ARGUMENT
A. Legal Standards
Rule 56 of the Minnesota Rules of Civil Procedure establishes the standard for summary
judgment. On a motion for summary judgment, Plaintiffs are simply required to present specific
facts showing that there is a genuine issue for trial. Minn. R. Civ. P. 56.05. The Minnesota
Supreme Court has cautioned that summary judgment should be applied carefully: “Summary
judgment is a blunt instrument and should not be employed to determine issues which suggest
that questions be answered before the rights of the parties can be fairly passed upon. It should be
employed only where it is perfectly clear that no issue of fact is involved . . .” Donnay v.
Boulware, 275 Minn. 37, 45, 144 N.W.2d 711, 716 (1966).
“The district court’s function on a motion for summary judgment is not to decide issues
of fact, but solely to determine whether factual issues exist.” DLH, Inc. v. Russ, 566 N.W.2d 60,
70 (Minn. 1997). In so doing, the evidence must be viewed in the light most favorable to the
party opposing the motion. Smith, et al., v. Woodwind Homes, Inc., 605 N.W.2d 418, 422 (Minn.
Ct. App. 2000) (citing Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn.1993)). All doubts and
factual inferences must be resolved in favor of the non-moving party. Offerdahl v. Univ. of
Minn.Hosps, & Clinics, 426 N.W.2d 425, 427 (Minn.1988). Ultimately, the moving party has
25
the burden of showing the absence of any genuine issue of material fact. Smith, 605 N.W.2d at
422 (citing Minn. R. Civ. P. 56.03).
Additionally, summary judgment must not operate to deny a litigant an opportunity to
discover and present facts. Vieths v. Thorp Finance Co., 232 N.W.2d 776, 778 (Minn. 1975). In
short, summary judgment may only be granted if (1) both parties have had an opportunity to
discover and present facts, and (2) there is no genuine issue of material fact.
B. If Defendants’ Motion Is Not Denied On The Current Record, The Court Should Stay Disposition Of The Motion To Allow Plaintiffs To Engage in Discovery.
Even with limited time and lack of access to the complete record relevant to the issues in
this case, Plaintiffs demonstrate below that genuine issues of material fact compel denial of
Defendants’ motion. However, if the Court is not persuaded to deny this motion outright,
Plaintiffs seek a continuance to allow for additional discovery before any decision is made.
Minn. R. Civ. P. 56.06 provides:
Should it appear from the affidavits of a party opposing the motion that the party cannot for reasons stated present, by affidavit, facts essential to justify the party's opposition, the court may refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just.
Continuances to conduct discovery should be “liberally granted.” Rice v. Perl, 320 N.W.2d 407,
412 (Minn. 1982). “This is especially true when the party seeking the continuance is doing so
because of a claim of insufficient time to conduct discovery.” Id.
Normally the court will grant additional time to the nonmoving party to obtain the facts if the reason is a matter of insufficient time. A continuance or permission to engage in further discovery should not be denied to a party except in the most extreme circumstances. * * * As a practical matter, the court should be liberal in granting additional time for purposes of preparing affidavits or discovery if a party has any real reason to believe that facts can be established by such means.
26
Id. (quoting J. Hetland & O. Adamson, 2 Minnesota Practice 588 (1970)). In other words, two
key factors in deciding to continue discovery are (1) whether the non-moving party was diligent
in seeking discovery and (2) whether that party has a good faith belief that discovery will
uncover material facts. Id.
This case was filed just four months ago. Plaintiffs filed document requests within two
weeks of receiving Defendants’ answer to their complaint, and deposition notices not long after
that. Plaintiffs tried to persuade the Defendants to engage in a relatively short period of
discovery before filing their summary judgment motion but their efforts were rebuffed.
Plaintiffs’ diligence is indisputable. Defendants’ responses to Plaintiffs’ first set of document
requests are not due until after the deadline for this response. In responding to Defendants’
motion for summary judgment, Plaintiffs have had less than three weeks to analyze the
documents served by Defendants with their motion.
Based on the documents submitted with Defendants’ motion, and additional documents in
the public record and provided by Plaintiffs and class members, Plaintiffs’ counsel believe that
additional relevant and probative documents exist besides those that Defendants filed with their
motion. Coler Aff., ¶¶ 7-8. Plaintiffs’ arguments further demonstrate that deposition and expert
testimony will be probative of the issues to be decided. Id.; see Affidavit of Claude Poulin, filed
with this Brief. As required by Minn. R. Civ. P. 56.06, and to the extent possible given the early
stage of this litigation, Plaintiffs provide affidavit testimony as to the discovery sought, the
sources of that evidence, and their good faith belief that discovery will uncover additional
material facts. Id., and Exs. 2-3.
In sum, Plaintiffs assert that even the current record demonstrates that genuine issues of
material fact warrant outright denial of Defendants’ motion. However, if the Court is not
27
inclined to deny Defendants’ motion outright, then Plaintiffs ask it to order a continuance
sufficient to allow Plaintiffs a reasonable opportunity to discover documents and information
probative of their claims. Plaintiffs have made the showing necessary for a continuance under
Minn. R. Civ. P. 56.06: (1) they have been diligent in seeking discovery, and (2) they have a
good faith belief that discovery will uncover material facts.
C. Even Based On This Limited Record, Defendants Have Failed To Establish As A Matter of Law That The 2009 And 2010 Pension Legislation Do Not Violate The Contract Clauses Of The United States And Minnesota Constitutions
1. The Contract Clauses of the United States and Minnesota Constitutions Protect
Contractual Relationships Like Those at Issue Here “No State shall . . . pass any . . . Law impairing the Obligation of Contracts.” U.S. Const.
art. I, § 10, cl. 1.
The Contract Clause is one of the United States Constitution’s few express bans on the
state, and its unique history suggests not only a present importance, but also an importance to the
founding and development of America.11 The United States Supreme Court observed that the
framers placed a high value on the protection of contracts: “Contracts enable individuals to
order their personal and business affairs according to their particular needs and interests. Once
arranged, those rights and obligations are binding under the law, and the parties are entitled to
rely on them.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 (1978).
11 The clause resulted from the tenuous economic state of the Republic following the Revolution, and the uncertainty created by the states’ attempts at remedying the problem. These state measures included the enactment of laws that stayed collection of debts, laws that changed contracts to allow installments, laws allowing the payment of debts in commodities, state printing of new paper money, and laws designating the new paper money as legal tender for payment of debts. The framers of the Constitution recognized the instability caused by such contractual uncertainty, and understood the direct link between personal autonomy and the inviolability of contracts; therefore they sought to create a blanket assurance that private and public contracts would have the full force of law. James W. Ely Jr., “Economic Liberties and the Original Meaning of the Constitution,” 45 San Diego L.R. 673, 698-700 (2008).
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“The modern Contract Clause analysis involves three components: “‘(1) Does a
contractual relationship exist, (2) does the change in the law impair that contractual relationship,
and if so, (3) is the impairment substantial?’” Koster v. City of Davenport, Iowa, 183 F.3d 762,
766 (8th Cir. 1999) (quoting Honeywell, Inc. v. Minn. Life and Health Ins. Guar. Assoc., 110
F.3d 547, 551 (8th Cir. 1997) (en banc)). “If a substantial impairment of a contractual
relationship exists, the legislation nonetheless survives a constitutional attack if the “impairment
is ... justified as ‘reasonable and necessary to serve an important public purpose.’” Id. (quoting
Parella v. Retirement Bd. of the R.I. Employees’ Retirement Sys., 173 F.3d 46, 59 (1st Cir.
1999)); see U.S. Trust Co. v. N.J., 431 U.S. 1, 25 (1977).
The Minnesota Constitution provides similar protections. Minnesota’s Contract Clause
provides: “No bill of attainder, ex post facto law, or any law impairing the obligation of contracts
shall be passed . . .” Minn. Const. art I, § 11. To establish a violation of the Minnesota Contract
Clause, “a court initially considers whether the state law has, in fact, operated as a substantial
impairment of a contractual obligation.” Jacobsen v. Anheuser-Busch, Inc., 392 N.W.2d 868,
872 (Minn. 1986). If a substantial impairment is found, “those urging the constitutionality of the
legislative act must demonstrate a significant and legitimate public purpose behind the
legislation.” Id.
2. Previous Legislatures had the Power to Bind Future Ones with regard to Pension Obligations.
Before turning to the three-part modern Contracts Clause analysis, Plaintiffs address
Defendants’ contention that the Minnesota Legislature in 1991 did not have the power to bind
future legislatures to utilize a specific statutory postretirement adjustment formula to increase the
Retirees’ pensions. See Def. Memo at 34. Defendants’ argument is without merit because the
State has not contracted away an essential attribute of its sovereignty.
29
Under its reserved powers, a state may not enter into a contract that limits its power to act
in the future where the contract “surrenders an essential attribute of its sovereignty,” U.S. Trust
Co., 431 U.S. at 23. It is well-settled that “a State cannot be bound to a contract forbidding the
exercise of its police power,” and that “a State cannot contract away [its] power of eminent
domain,” U.S. Trust Co., 431 U.S. at 24 n.21 (citations omitted). However, it is equally clear
that a state may “bind itself in the future exercise of the taxing and spending powers,” id. at 24,
and the Supreme Court has “has regularly held that the States are bound by their debt contracts.”
Id. at 24 (citing N.J. v. Wilson, 7 Cranch 164 (1812) (State could properly grant a permanent tax
exemption and the Contract Clause prohibited any impairment of such an agreement); see
Murray v. City of Charleston, 96 U.S. 432, 445 (1887) (A state’s or city’s “promise to pay, with
a reserved right to deny or change the effect of the promise is an absurdity.”).
Pension benefits constitute “‘[d]eferred compensation for services rendered.’” In re
Eilbert, 162 F.3d 523, 527 (8th Cir. 1998) (quoting BLACK'S LAW DICTIONARY 1134 (6th
ed.1990)). By delaying payment of the employee’s compensation, a long-term debt is created.
This debt is no different than any other long-term obligation that the state enters into, such as a
30-year bond. In Booth v. Sims, 456 S.E.2d 167, 176-177 (W. Va. 1995), the West Virginia
Supreme Court reviewed the constitutionality of the state’s pension system and found:
[P]ension systems are constitutional for the same reasons that special revenue bonds are constitutional: The pledge for the pension fund derives from the actuarially sound contributions of the employees and the Division; that is, the fund is expected to generate its own money to meet its eventual obligations. Because money is expected to be put away as a condition precedent to fund the system, pensions are legitimate debts of the state.
Id. at 176-177.
In sum, and as further demonstrated by the discussion of Minnesota cases below at pp. 33
to 36 (e.g., Sylvestre v. Minnesota, 214 N.W.2d 658 (Minn. 1973)), the state can bind future
30
legislatures with regard to pension obligations. Indeed, if this Court were to hold otherwise,
there would be no protection for any part of Retirees’ pensions whatsoever: The legislature
would be free in the future to reduce Retirees’ monthly pension to one dollar or to zero.12
3. Retirees have a Contractual Right to Receive Postretirement Adjustments Pursuant to the Statutory Formula in Effect at the Time of Retirement.
a. The statutory language provides no discretion in the payment of postretirement benefits.
Defendants claim as an undisputed fact that the statutory scheme providing for the
postretirement increases “is not a contract.” Def. Memo at 34. Put another way, Defendants
argue that the Plaintiffs have no contractual right to the ongoing application of the postretirement
adjustment formula in effect at the time they retired, meaning that the Legislature can change the
formula for retirees’ future postretirement adjustments at will. Defendants’ argument is wrong.
12 In arguing their position, Defendants do not cite the relevant and dispositive holding in U.S. Trust Co. or related Supreme Court precedent. Instead, they rely on two Minnesota cases, neither of which is probative of the issues here.
In State v. Great Northern Railway, Co., 106 Minn. 303 (1908), the Supreme Court of Minnesota did not hold that one legislature cannot bind a future legislature in contractual commitments; rather, the Court “merely expressed doubts” about whether the Minnesota legislature had actually entered into a contract in this instance. Id. at 325. In fact, this case supports the Plaintiffs’ position here by making it clear that contracts by the legislature to limit future taxation are enforceable. (“We are, of course, not to be understood as intimating an opinion that a contract of the tenor and effect of the one claimed could not legally have been entered into by the territory…” Id. at 325.).
Defendants interpret the holding of Minnesota Education Association v. State, 282 N.W.2d 915 (Minn. 1979) far too broadly. This case involved the issue of whether a pay raise issued by an arbitrator during negotiations constituted a binding contract before the legislature approved it. In a brief two-sentence discussion concerning the issue of binding future legislatures, the Court merely held that the state may not surrender in perpetuity its right to review future contracts. Id. at 919 (“not a single state legislature in the country is bound by arbitration awards to state employees.”). Nothing about this case indicates that it may be applied to pension legislation or any other state- ratified act that constitutes a contract.
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The plain language of the statutes granting annuities and postretirement adjustments guarantees
application of a specific formula for both.
First, the initial annuity amount and the postretirement adjustments are framed in
mandatory terms. Retirees are “entitled” to a retirement annuity calculated according to the
statute.13 See S. Ex. 1. Adjustments to the annuity, for the time period from 1992 through 2009,
“must” or “shall” be made “automatically” and “annually” and in accordance with Minn. Stat. §
11A.18. See S. Ex. 2. The text at §11A.18 states that the state board “shall use the procedures”
in the statute to determine whether a postretirement adjustment is payable. See id.
When the postretirement adjustment statute changed in 2009 as a result of the dissolution
of the Post Fund, the new statute articulated employees’ rights to the postretirement adjustment
using the same mandatory term of entitlement that it used for the initial annuity calculation.
Minn. Stat. § 356.415 states that retirees are “entitled” to a postretirement adjustment “as
follows.” S. Exs. 3, 4. In 2009, the “as follows” directed an annual, automatic postretirement
increase of 2.5%; in 2010, it directed annual, automatic amounts that varied by the plan, but
resulted in decreases down to 0%. Just as the initial annuity amount each year was determined
by the statute in place that year, the parallel language of the postretirement adjustment leads
inexorably to the conclusion that it was guaranteeing or promising application of that same
formula annually and automatically. Nothing in the statutory text indicates that the grant of the
annuity, including its postretirement adjustments, was qualified or subject to change in any way.
Defendants’ sole argument to the contrary is based on the use of the word “eligible” in
the section of each pension statute specifically linking the annuity to the postretirement
adjustment statute. These links state that a retirement annuity is “eligible for postretirement 13 BLACK’S LAW DICTIONARY (8th ed. 2004) defines “entitle” as meaning “To grant a legal right to or qualify for.”
32
adjustments under section 356.45,” which in turn states that the benefit recipient is “entitled” to a
specifically defined adjustment. See S. Exs. 3,4. Black’s Law Dictionary defines “eligible” as
meaning “fit and proper to be selected or to receive a benefit.” BLACK’S LAW DICTIONARY (8th
ed. 2004). Nothing about the meaning or use of the word “eligible” in the linking statute
contradicts, eliminates, or changes the fact that the postretirement statute declares that annuity
recipients are “entitled” to a postretirement adjustment “as follows.” 14
Similarly, Defendants cite to no statutory language that supports their position that no
contract has been violated as long as the Legislature does not reduce the amounts of
postretirement adjustments the Retirees have already received.15 See Def. Memo at 9-10. The
texts at Minn. Stat. § 353.29, subd. 7 (2008) and Minn. Stat. § 352.115, subd. 9 state only that
annuities may not be increased or decreased except as provided in that chapter. Similarly, Minn.
Stat. § 354.44, subd. 7a(b) (2008) prohibits decreases from the “amount originally determined on
the date of retirement and as adjusted on each succeeding January 1 under [the statutory formula
determining that adjustment]” (emphasis added). These statutory texts only state that once a 14 The statutes consistently use “eligible” when referencing the annuity, but “entitled” when referencing the annuity recipients. See S. Exs. 3, 4. This makes sense because persons have rights, while annuities do not. 15 Defendants on occasion use the term “vested pension” as a description of the monetary amount that a current Retiree is already receiving, Def. Mem. at 3, thereby implying that only actual monetary amounts received can be vested. This position flies in the face of the meaning of the term “vested,” defined by BLACK’S LAW DICTIONARY (8th ed. 2004) as “[h]aving become a completed, consummated right for present or future enjoyment, not contingent, unconditional; absolute.” (emphasis added). See also Dougherty v. Dougherty, 950 A.2d 592, 594 (Conn. App. 2008) (emphasis added) (“plaintiff, as a member of the Indiana public employees' retirement fund, had a vested interest in a future retirement benefit consisting of (1) an annuity savings account and (2) a monthly pension for life.”); Stephen R. Bruce, Pension Claims Rights and Obligations 187 (2d ed. 1993) (“When a participant has a vested or nonforfeitable right to accrued benefits it means the participant has a claim to payment, on either an immediate or deferred basis … which is “unconditional, and legally enforceable against the plan” (citing ERISA)).
33
retiree has begun receiving an annuity, no decrease may occur. The texts do not state that the
Legislature retains the right to apply a prospective change of formula to current Retirees’
annuity.16
“When the words of a law in their application to an existing situation are clear and free
from all ambiguity, the letter of the law shall not be disregarded…” Minn.Stat. § 645.16 (2009).
These statutes say that retirees are “entitled” to both their initial annuity and the postretirement
adjustments based on a specific formula. The texts are replete with mandatory and clear
language, including “must,” “shall,” “automatically,” “annually” and “as follows,” that warrant
interpretation according to their plain meaning. See Minn. Stat. § 645.44, subd. 15, 16 (2009)
(“must” and “shall” are mandatory); Minn. Stat. § 645.08 (2009) (words are construed
“according to their common and approved usage”). To deprive this language of its clear
meaning would be to wrongly pick and choose among the words rather than to give effect to the
entire statutory text. Minn. Stat. §645.16 (courts should give effect to all provisions of a law).
b. Where the statutory language providing a monetary retirement benefit is mandatory, Minnesota’s courts have found that a contract exists
Minnesota’s Supreme Court has found that a contract exists where the statutory language
requires the public pension system or the public employer to provide monetary retirement
benefits.
The first case in which this issue arose was in Sylvestre v. Minnesota, 214 N.W.2d 658
(Minn. 1973). Prior to 1967, Minnesota law provided that if a retired district judge has attained
16 Defendants make a groundless standing argument based on this claimed “undisputed fact” that the Retirees have experienced no actual monetary reduction of their annuity. To the extent Plaintiffs demonstrate a contract exists that entitles Retirees future increases pursuant to a promised formula, they have experienced an injury and Defendants’ standing argument must fail. The Retirees have a stake in a judiciable controversy for which relief may be granted by a court. See State ex rel. Humphrey v. Philip Morris Inc., 551 N.W.2d 490, 493 (Minn. 1996).
34
the age of at least 70 years and has served 15 years as a judge, “`he shall receive for the
remainder of his life, one-half the compensation Allotted to the office.’” Id. at 660 (emphasis
added) (citing Minn.St. 1965, s 490.12, subd. 2(a)). In 1967, the legislature amended the
provision to read in pertinent part, “` . . . [h]e shall receive for the remainder of his life, one-half
the compensation allotted for the office At the time of his retirement.’” Id. (emphasis added)
(quoting Ex.Sess.L.1967, c. 38, s 5). The provision was amended again in 1969 to read: “ . . .
[H]e shall receive for the remainder of his life, one-half the compensation allotted to the office At
the time of his retirement or on July 1, 1967, whichever is greater.’” Id. (emphasis added)
(quoting L.1969, c. 987).
The state applied the 1967 and 1969 amendments retroactively to judges who retired
prior to 1967. For example, under the 1967 and 1969 formulae, these judges received $11,000 in
retirement income in 1971, one-half of the $22,000 allotted for the office on July 1, 1967. In
1971, the allotment was raised by the legislature to $29,000. Under the pre-1967 formula, the
retirement compensation for the judges would have increased to $14,500 but under the 1967 and
1969 formulae, they continued to receive $11,000 a year. Id. at 661. The retired judges sued the
state claiming the retroactive application of the 1967 and 1969 amendments impaired their
contractual rights, in violation of the Contract Clauses of the United States and Minnesota
Constitutions. Id.
The Supreme Court of Minnesota in Sylvestre first reviewed the reasoning in Hartung v.
Billmeier, 66 N.W.2d 784 (Minn. 1954), which the court found “persuasive.” Id. at 664.
Hartung involved a promise by a private employer to give his employees a stated bonus if they
stayed with him 5 years. The employee stayed with the employer for 6 years and 9 months but
35
the employer did not pay the bonus promised. In upholding the employee’s right to recover the
sums promised, the Minnesota Supreme Court in Hartung stated:
When a promise is thus accepted by performance of the designated act or forbearance, the promisor's offer is converted into a unilateral contract which comes into being the moment the act or forbearance has been fully performed. Here the defendant accepted plaintiff's offer by forbearing to leave plaintiff's employment for five years. The moment plaintiff's offer was thus converted into a contract, the bonus became due and payable.
Hartung, 66 N.W.2d at 789 (citations omitted) (quoted in Sylvestre, 214 N.W.2d at 665).
Based on Hartung, the Court in Sylvestre concluded that the retired judges did have a
contract with the State to provide a certain level of compensation in retirement, explaining:
Here, a judge gives up the right to continue in the only field of endeavor in which he has been educated and is experienced in order to accept a position, often for a much smaller financial reward, anticipating that upon retirement the state will continue to pay him part of his salary. Inflation affects retired judges the same as it does anyone else; and a judge's reliance upon the state's offer to pay, upon his retirement, a part of the salary allotted to his office surely is one of the significant considerations that induces the judge to remain in office during the required period of time and until the age permitting retirement. . .
Id. at 666.
The other Minnesota Supreme Court case closely on point is Christensen v. Minneapolis
Municipal Employees Ret. Board, 331 N.W.2d 740 (Minn. 1983). In this case, Larry Christensen
retired from the service of the City of Minneapolis in 1974 at age 38. Because he had served the
requisite 10 years, he became immediately eligible to receive, and did begin receiving, monthly
pension benefits upon retirement. In 1980, the retirement board suspended Christensen pension
benefits until he attained age 60, as a result of a new age requirement for entitlement to receive
benefits. Id. at 742-743 (citing 1980 Minn. Laws, ch. 342, § 22). Christensen sued, claiming
36
that the new statute impaired his contract of employment with the City of Minneapolis, in
violation of the federal and state constitutions. 17 Id. at 743.
While a disclaimer of contract rights was not part of the Minneapolis pension plan’s
statutory scheme, the statutes governing MSRS, PERA and TRA at the time all stated that their
pension statutes did not create contractual rights. Id. at 748 (citations omitted). In part because
of this statutory language, the Court chose to analyze this case under a promissory estoppel
theory rather than under a unilateral contract analysis, as in Sylvestre. Still, the Court expressly
found that the institution of a minimum benefit entitlement age for a city public employee was an
“unconstitutional impairment of contractual obligations to the extent that it purports to apply to
elected city officials, . . . already retired at the time of its enactment.” Id. at 752.
Other state courts have found that a public pension cost-of-living adjustment constitutes a
contractual right. For example, in Police Pension and Relief Board of the City and County of
Denver v. McPhail, 338 P.2d 694 (Colo. 1959), retirees from the Denver Police Department
challenged the repeal of a provision in the city charter that provided that police pensions would
rise at half the rate of increases to the salaries of current police officers. Plaintiffs alleged and
the court agreed that this so-called “escalator clause” became a vested contractual right upon
their retirement. Id. at 701; see also Booth, 456 S.E.2d at 187 (pension cost of living adjustment
is a vested right); United Firefighters of Los Angeles City v. City of Los Angeles, 210 Cal.App.3d
17 Nothing in Christensen, or in cases that have cited it, limit its holding to small groups as Defendants argue. In fact, the Court’s expansive language when applying the Contract Clause analysis belies the argument that the Court would not extend Christensen to larger groups of employees. (“At stake is the need for public employees to be secure in their retirement programs and, on the other hand, the public's concern with the integrity of the pension fund and the state's overall fiscal soundness.” Christensen, 331 N.W.2d at 751.)
37
1095, 1108 (1989) (same); Pasadena Police Officers Association v. City of Pasadena, 147
Cal.App.3d 695, 702 (1984) (same).
c. Defendants’ representations and conduct in implementing the postretirement adjustments are consistent with plaintiffs’ interpretation of the statutes
The conduct of the Defendants prior to the 2009 and 2010 Pension Legislation provides
additional compelling evidence that the Retirees have a contractual right to postretirement
adjustments based on the formula in place at the time of retirement. If the Court finds the
statutory language ambiguous, this evidence should be considered both in interpreting the statute
and in determining whether at least an implied-in-fact contract exists. See Minn. Stat. § 645.16
(allowing consideration of extrinsic factors, including administrative interpretations, if a statute
is ambiguous); AFSCME Councils 6, 14, 65 and 96, AFL-CIO v. Sundquist, 338 N.W.2d 560,
567 (Minn. 1983) (“Where the evidence does not prove the existence of an express agreement, a
contract implied in fact may be established by circumstantial evidence showing a mutual
intention to contract.”).
A telling legislative enactment occurred the year after the Minnesota Supreme Court
decided Christensen. Among other reasons, Christensen applied promissory estoppel rather than
contract principles in its reasoning because the pension statutes governing the Retirement
Systems at the time contained explicit disclaimers of contract rights. Christensen, 331 N.W.2d at
748. However, the next year, the Minnesota Legislature repealed every one of the “no contract”
disclaimers. 1984 Minn. Laws, ch. 564, § 51. In a 2003 memo to the Retirement Systems,
Assistant Attorney General Jon K. Murphy advised the Retirement Systems that “public
employees have gained a stronger claim to a property (contract) right in their pensions through
the repeal of the ‘no contract’ clauses.” Coler Aff., Ex. 20 at 3 (November 14, 2003 Memo by
38
Jon K. Murphy titled “State Cases Relating to Public Pension Rights and Benefit
Modifications”).
Even without discovery, Plaintiffs have offered compelling factual evidence above that
the Retirement Systems viewed the postretirement adjustment formula as guaranteed and
mandatory and so represented it to the active employees and Retirees.
In addition, the Pension Principles recognized the contractual nature of the postretirement
formula by stating that the Legislature should not reduce overall benefit coverage for persons
currently receiving retirement benefits and that, if a reduction is recommended, it should occur
“in combination with a proposed benefit increase or benefit increases” or should be imposed only
on new pension plan members. Klausing Ex. 6, pp. 5-6. And indeed, as discussed above, the
one effective change in the postretirement adjustment formula that occurred in 1997 (decrease of
inflation cap from 3.5% to 2.5%) was accompanied by a one-time benefit increase to offset the
ongoing decrease.
Defendants attempt to muddy the issue by claiming that the Legislature has changed the
postretirement adjustments several times. This is not true for the period from 1992 through
2009.18 With the exception cited above, for which compensation was given, the formula has
remained the same.19 The actual adjustment amounts have varied because the formula depended
18With respect to postretirement annuity adjustments, the only relevant time period is that from 1992 through the present because the class alleged in the Amended Complaint consists only of persons who retired from 1992 forward. Moreover, it appears that adjustments to post-retirement increases prior to 1992 primarily involved increasing rather than decreasing the benefit. Def. Mem. at 29 (legislative increase granted in 1973; 4% increase granted in 1978). 19 The change to the postretirement adjustment that occurred in 2006, Def. Mem. at 29, is irrelevant to the issues here. That change was not effective until July 1, 2010 (Defendants mistakenly stated the date as January 1, 2010) and for new retirees it was supplanted by
39
on variable events. For example, when the adjustment included an inflation component
consistent with the CPI index up to 2.5%, the percentage and resulting amount varied just as
inflation did. These variations from year to year do not modify Retirees’ entitlement to a
particular postretirement formula (or its equivalent, if changes were made with accompanying
compensation, as occurred in 1997).
Finally, the Defendants’ understanding that the Post Fund was obligated to pay at least up
to a 2.5% COLA each year is confirmed by the method used to calculate whether Retirees may
receive an investment component payment in any given year. Amounts could not be considered
for payment unless they exceeded a designated amount needed to cover the basic annuity plus
the 2.5% automatic COLA increase. See e.g., Vanek Ex. 13 at 3 (Winter 2000 “the PERA
Graph,” explaining that the first 8.5% of Post Fund growth is designated for the initial pension
amounts (6%) and the COLA increase (2.5%), and that only growth above that amount may be
considered for distribution under the investment component); see also, Bergstrom Ex. 11 at 3
(Summer 2007 Newsletter for Retirement Systems of Minnesota, stating that “cost of retaining a
fixed 2.5 percent [increase] is already built into the actuarial assumptions for the plan”).
Whether the Court decides that it must construe an ambiguous statute or determine
whether an implied-in-fact contract exists, plaintiffs have offered significant evidence that --
prior to enactment of the 2009 Legislation -- the Defendants operated on the belief that the
annuity recipients had a contractual entitlement to the postretirement adjustment involving a
cost-of-living increase up to 2.5% and an investment component. This evidence alone compels a
finding that summary judgment is inappropriate here. “Whether a contract is to be implied in
the 2009 legislation discussed below. That adjustment never became operative and no Class Member could have retired under that formula.
40
fact, and the existence of the terms of such a contract, are questions of fact to be determined by
the trier of fact . . . .” Sundquist, 338 N.W.2d at 567.
4. Questions of Fact Exist Whether the 2009 and 2010 Pension Legislation Substantially Impair the Rights of Retirees to Receive Future Postretirement Adjustments Pursuant to the Formula in Effect Upon their Retirements.
The next step in the Constitutional analysis is determining whether the 2009 and 2010
Pension Legislation substantially impair the Retirees’ pension rights. Defendants argue that
there has not been an impairment and that Retirees’ claim is “non-existent” because Retirees will
still receive some postretirement increases going forward. Def. Memo, p. 41. This argument is
absurd: If the Court were to accept it, then it would never be unconstitutional to eliminate
promised postretirement increases – as long as at least one dollar of such future increases is left
in place. At a minimum, questions of fact exist whether a substantial impairment has occurred.
As discussed in the factual section, the 2009 Legislation took away the two-component
postretirement adjustment and replaced it with an annual 2.5% increase. Def. Mem. at 30.
This formula change did not immediately decrease postretirement adjustments because the
funds were not in a position to provide an increase based on investments. However, the
long-term impact is to decrease the formula guaranteed to public employees who retired
from 1992 through June 30, 2009. Those Retirees retiring between 1992 and 2002
received significant increases based on the success of the pension funds, and certainly the
elimination of those potential increases is a projectable and not insubstantial loss. See
e.g., Bergstrom Ex. 2 at 3 (MSRS Messenger (newsletter), Spring 2007, showing increases
from 1997 through 2007 ranging from .07% to 11%). Plaintiffs are at least entitled to
41
discovery before they are asked to withstand a summary judgment motion on this issue
with respect to the 2009 Legislation.
And it is indisputable that the 2010 legislation decreased the postretirement
adjustments for all retirees except those joining the retired ranks in 2010. It suspends or
reduces the formula providing for postretirement increases of 2.5% until the Retirees’ particular
plan becomes funded at 90% MVA. Because there exists the possibility that the previous 2.5%
may be reinstated sometime in the future, Defendants claim that the Legislation reduces benefits
only “temporarily.” Def. Mem. at 38. This claim has no factual support with respect to MSRS
and PERA increases because Defendants submitted no documents containing any actuarial
analysis projecting when or if the plans will reach 90% funding as a result of the 2010 Pension
Legislation. The TRA’s actuary predicted that the 2010 Pension Legislation will not restore the
fund to 90% funding at any time during the next 35 years. This is hardly “temporary.”
Even if the Plans’ funding returns to 90% in just a few years and the postretirement
adjustment returns to 2.5%, the amount that the retirees will receive throughout their retirement
will be permanently reduced. As detailed on page 20, these cuts will likely cost the retirees tens,
if not hundreds, of thousands of dollars. Such an impairment is certainly “substantial.”
Courts have consistently found substantial impairments when cost-of-living decreases are
made to retirees’ pensions.20 In United Firefighters of Los Angeles City, the court held that
20 Several other scenarios of smaller proportions have been considered substantial impairments. Courts have even found a substantial impairment when public employees were involuntarily furloughed for a week or less, because the loss of the expected pay “would likely wreak havoc on the finances of many of the affected workers and can only be considered substantial.” Opinion of Justices (Furlough), 609 A.2d 1204, 1210 (N.H. 1992); Massachusetts Community College Council v. Commonwealth, 649 N.E.2d 708, 712 (Mass. 1995) (mandatory furloughs substantially impaired rights of state employees). A substantial impairment was found under New York’s “payroll lag” law that allowed the withholding of two weeks of employees’ pay until after they ended employment. Ass’n of Surrogates & Supreme Court Reporters v. State of
42
imposition of a 3% cap on pension cost-of-living adjustments for firefighters hired during a
period with no caps constituted an impairment of a vested contractual right. 210 Cal.App.3d at
1108. In Booth, the State of West Virginia reduced the pension cost-of-living adjustments from
3.75% to 2% for active State Troopers who were eligible for retirement, and argued that the
adjustment was necessary to preserve the solvency of the pension fund. 456 S.E.2d at 187. The
Supreme Court of West Virginia held that the reduction in the cost-of-living adjustments was an
unconstitutional impairment, and that the state retained the burden of ensuring the solvency of
the fund. Id. (“Requiring the petitioners to protect the future solvency of the pension system is
an unconstitutional shifting of the state’s own burden.”). See also Pasadena Police Officers
Association, 147 Cal.App.3d 707 (cost-of-living adjustments benefits could not be capped on
retired police officers who opted post-retirement for pensions with uncapped cost-of-living
adjustments in lieu of a fixed pension).
Another way to view the substantiality of the impairment is to examine how the
Defendants valued the decreases. For example, in a 2010 presentation to a House committee,
PERA Executive Director Mary Most Vanek projected that the proposed decrease of 1.5% in the
PERA postretirement adjustment would yield an annual benefit of 3.6% of PERA’s $5 billion
payroll, or $180 million. Vanek Ex. 9 at 7 (PowerPoint presentation “PERA Plans’ Funding
Proposals”).
New York, 940 F.2d 766, 772 (2d Cir. 1991); see also Univ. of Hawaii Professional Assembly v. Cayetano, 183 F.3d 1096 (9th Cir. 1999) (payroll lag law); Donohue v. Paterson, 2010 WL 2178749 (N.D. N.Y. May 12, 2010) (temporary withholding of 4% salary increase that would later be reimbursed was held to be a substantial contractual impairment.); Bailey v. State, 500 S.E.2d 54 (N.C. 1998) (statute that placed cap on tax exemption on employees’ retirement benefits was a substantial contractual impairment.); State ex rel. Cannon v. Moran, 331 N.W.2d 369 (Wis. 1983) (salary setoff that reduced judges’ salaries by the amount of pension benefits they received from prior judicial service).
43
Plaintiffs at a minimum have shown that a genuine issue of fact exists whether the
impairments at issue are substantial.
5. Questions of Fact Exist Whether the 2009 and 2010 Pension Legislation is “reasonable and necessary to serve an important public purpose” Where legislation substantially impairs a vested right, it may pass constitutional muster
only if the government meets its burden of establishing that it was “reasonable and necessary to
serve an important public purpose.” U.S. Trust Co., 431 U.S. at 25. Minnesota has a similar
standard. If a substantial impairment is found, “those urging the constitutionality of the
legislative act must demonstrate a significant and legitimate public purpose behind the
legislation.” Jacobsen v. Anheuser-Busch, Inc., 392 N.W.2d 868, 872 (Minn. 1986).
“Unless the State itself is a contracting party, ... ‘[a]s is customary in reviewing economic
and social regulation, ... courts properly defer to legislative judgment as to the necessity and
reasonableness of a particular measure.’” Energy Reserves Group, Inc. v. Kansas Power & Light
Co., 459 U.S. 400, 412-413 (1983) (quoting U.S. Trust Co., 431 U.S. at 22-23). But where the
State attempts to abridge its own contract, “‘complete deference to a legislative assessment of
reasonableness and necessity is not appropriate because the State's self-interest is at stake.’”
Christensen, 331 N.W.2d at 751 (quoting U.S. Trust Co., 431 U.S. at 26); see also Energy
Reserves Group, 452 U.S. at 412 n.14 (“When a State itself enters into a contract, it cannot
simply walk away from its financial obligations. In almost every case, the Court has held a
governmental unit to its contractual obligations when it enters financial or other markets.”).
In determining whether a substantial impairment is permissible under the Contracts
Clause, the existence of an important public purpose is not necessarily enough. Instead, courts
must utilize a “balancing test” that measures the level of impairment against the importance of
44
the public purpose. The Minnesota Supreme Court in Christensen, quoting the Eighth Circuit,
explained:
“However, the contracts clause is a viable restriction of the powers of the States, and if a State undertakes to alter substantially the terms of a contract, it must justify the alteration, and the burden that is on the state varies directly with the substantiality of the alteration. A serious alteration of the terms of a contract resulting from state legislation is permissible if, but only if, the legislation is necessary to meet a broad and pressing social or economic need, if the legislation is reasonably adopted for the solution of the problem involved, and if it is not over broad or over harsh.”
Christensen, 331 N.W.2d at 751 (emphasis added) (quoting White Motor Corp. v. Malone, 599
F.2d 283, 287 (8th Cir. 1979)).
Given the degree to which the 2009 and 2010 Pension Legislation will diminish the
Retirees’ vested rights and the amount of money that the Retirees’ will lose, a court must
conduct a “careful examination of the nature and purpose of the state legislation.” Allied
Structural Steel Co., 438 U.S. at 245. A “State is not free to impose a drastic impairment when
an evident and more moderate course would serve its purposes equally well.” U.S. Trust Co.,
431 U.S. at 25; see Ass’n of Surrogates, 940 F.2d at 774 (“The contract clause, if it is to mean
anything, must prohibit [the State] from dishonoring its existing contractual obligations when
other policy alternatives are available.”). In addition, retroactivity questions and concerns are
heightened where, as here, government action has impaired contractual rights. Lynch v. United
States, 292 U.S. 571, 580 (1934) (“To abrogate contracts, in the attempt to lessen government
expenditure, would be not the practice of economy, but an act of repudiation.”); Perry v. U.S.,
294 U.S. 330, 351 (1935) (“[I]f [governments] repudiate their obligations, it is as much
repudiation, with all the wrong and reproach that term implies, as it would be if the repudiator
had been ... a citizen.”) (internal quotation marks omitted).
45
Here, Defendants have not shown, as they claim, that the funds were in crisis, or that
immediate changes were needed making it reasonable and necessary to take away already
promised benefits from current Retirees in the name of ‘shared sacrifice.” To the contrary, fund
administrators told their constituents that the pensions were not in immediate crisis and the funds
were showing substantial investment gains in 2010 as compared to the drop in 2009. See Facts,
supra, p. 22. See also Poulin Aff. ¶ 10 (“compared to other states, the Minnesota public
employee plans are not in a crisis situation.”), and ¶ 13. Indeed, as discussed above, the 2010
Legislation taking away pension benefits from the Retirees at the same time directed the
Retirement Systems to take a year to study the long-term health of the pension plans.
The limited evidence available to date shows that Defendants had many options in their
arsenal of solutions that could have been employed. Defendants have not exhausted available
policy alternatives that other states have pursued. As many other states did this year, Minnesota
could have chosen to reduce benefit levels for new hires, and raise employer contributions to the
national median level (8.7%) or their own historical levels. For example,
• MSRS contribution rates did not rise. A modest raise in the employer contributions from 5% to 5.9% (or to 5.45% for both employer and employees) would have had the same financial effect on the Plan as cutting the postretirement benefit from 2.5% to 2.0%. Bergstrom Ex. 22, p. 5 (projecting savings of 0.9% of pay for reduction in postretirement adjustment).
• The 2010 Pension Legislation will raise the PERA employer contribution rate in the Coordinated Plan by just 0.25% to 7.25% and the PERA Police and Fire Plan employee contribution by 0.2% to 9.6%. 2010 Minn. Laws, ch. 359 art. 1, §34 However, because the Plan does not coordinate with Social Security, PERA Police and Fire Plan active members will pay 4.85% less towards their retirement than what active members in the PERA Coordinated Plan pay into PERA and in Social Security taxes. Coler Aff., ¶ 12.
46
• The TRA employer rate will rise 2% over the next four years to 7.5%, 2010 Minn. Laws, ch. 359 art. 1, §49, but this level will still be lower than TRA’s historical rates prior to 1997 when the employer rate was 8.14%. Hacking Ex. 10 at 7.
See also, Poulin Aff. ¶¶ 10-11 (listing by Plaintiffs’ actuarial expert of available alternatives);
Hacking Ex. 10 at 7-11 (listing potential options, including lower formula for new hires).
Defendants claim that the budgetary pressures facing the State and other public
employers in Minnesota justified cutting the Retirees’ postretirement adjustment formula instead
of raising employer contributions. In addition, the evidence shows that Defendants considered
themselves constrained in their options by the current Governor’s mission to cut government
spending and not to raise taxes.21
Courts that have previously evaluated this type of justification have found that
“[f]inancial necessity though superficially compelling, has never been sufficient of itself to
permit states to abrogate contracts.” Carlstrom v. State, 694 P.2d 1, 6 (Wash. 1985) (citing U.S.
Trust Co., 431 U.S. at 30-31). As the Supreme Court has explained:
A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contracts Clause would provide no protection at all.
21 For example, in a May 5, 2010 statement, the governor declared: “I will fight to reduce spending and taxes in Minnesota and that battle continues. My commitment to the people of Minnesota remains the same: we will balance the budget without raising taxes.” Ex. 21 (May 5, 2010 Statement from the Governor). The Governor’s Office boasts that he reduced state government growth to less than 6%, which is the lowest increase under any Governor in at least the last 40 years and was almost half the lowest average of three prior governors. Ex. 22 at 2 (“2003-2009 Accomplishments: The Pawlenty Administration”). The state Department of Revenue found when nearly all of Minnesota’s taxes are factored in, tax rates have increased from 1990 to 2006 for the state’s lowest earners from 17.9% to 23.8% and decreased for its highest earners (top 1%) from 11.2% to 9.8%. See Ex. 23 at 20 (2009 Tax Incident Study).
47
U.S. Trust Co., 431 U.S. at 26 (footnote omitted). The Ninth Circuit has observed that the
Supreme Court’s words “are no less applicable when the purpose of an impairment is merely
saving money, as here, rather than spending it for a broad public purpose (mass transportation) as
in United States Trust.” Continental Illinois Nat. Bank and Trust of Chicago v. State of
Washington, 696 F.2d 692, 702 (9th Cir. 1983).
Courts time and time again have rejected governmental claims of “economic necessity”
unless the government is on the brink of financial ruin. In AFSCME v. City of Benton, Arkansas,
513 F.3d 874 (8th Cir. 2008), a union representing non-uniformed city employees sought to
enjoin the city from terminating the city’s payment of retiree health insurance premiums. After
finding that the union contract providing the benefits had been substantially impaired, the Eighth
Circuit rejected the city’s “economic necessity” argument:
The district court also found that the City had not demonstrated a significant economic interest to justify its actions. Although economic concerns can give rise to the City's legitimate use of the police power, such concerns must be related to “unprecedented emergencies,” such as mass foreclosures caused by the Great Depression. Allied Structural Steel Co. v. Spannaus, 439 U.S. 234, 242, 98 S.Ct. 2716, 57 L.Ed 2d 727 (1978). Further, to survive a challenge under the Contract Clause, any law addressing such concerns must deal with a broad, generalized economic or social problem.
Id. at 882 (emphasis added).
Just a few months ago, a federal District Court enjoined the City of Omaha from reducing
retiree health benefits to its former workers because there was no evidence that the “City is in an
`unprecedented emergency.’” Professional Firefighters Ass’n of Omaha, Local 385 v. City of
Omaha, 2010 WL 2426466, at *5 (D. Neb. June 10, 2010) (citing AFSCME v. Benton, Ark., 513
F.3d 874, 882 (8th Cir. 2008)). The City, like the Defendants here, claimed that the cuts should
be upheld because continuing the level of postretirement benefits would lead to higher taxes,
48
which is not in the public interest. The court rejected this argument: “While it is always in the
interest of the public to not increase taxes, the court finds the sanctity of the contractual
relationships between the parties is of greater interest to the public unless there is an
unprecedented emergency.” Id.; see Opinion of Justices (Furlough), 609 A.2d at 1204 (rejecting
economic necessity defense in furlough case).
Here, while the State may claim that it has budgetary pressures, the State’s fiscal health is
fairly strong. In conjunction with the sale of $865 million General Obligation State Bonds on
August 3, 2010, the credit rating agencies Standard &Poor’s and Fitch reaffirmed Minnesota
AAA rating, the highest available. Fitch Ratings offered this rationale in its statement:
• Minnesota's economy is balanced and wealth indicators are positive. • The state's debt position is strong, with a debt burden that is on the lower end of the
moderate range and rapid amortization. The state has conservative debt policies. • Management is sensitive to changes in the state's fiscal environment, with regular reviews of revenue forecasts.
Coler Ex. 24 (July 29, 2010 Minnesota Management & Budget Press Release). In a press
release, the Minnesota Management & Budget Commissioner commented: “These ratings
underscore what many people already know about Minnesota: our economic fundamentals are
relatively strong, our state government practices sound debt management, and everyone has
useful information due to our respected forecasts and cash monitoring practices.” Id.
In short, Defendants have not shown that it meets this requirement as a matter of law.
Numerous fact questions exist that make summary judgment inappropriate and entitle Plaintiffs
to discovery.
49
D. Defendants have Failed to Establish as a Matter of Law that the 2010 Pension Legislation Does Not Violate The Takings Clauses Of The United States and Minnesota Constitutions.
1. The Takings Clauses of the United States and Minnesota Constitutions.
The Fifth Amendment of the United States Constitution provides: “private property [shall
not] be taken for public use, without just compensation.” U.S. Const. Amend. V. This provision
is made applicable to the states under the Fourteenth Amendment to the United States
Constitution. Penn Central Transp. Co. v. New York City, 438 U.S. 104, 122 (1978). Similarly,
the Minnesota Constitution provides: “Private property shall not be taken, destroyed or damaged
for public use without just compensation.” Minn. Const. art. I, § 13. Minnesota courts may rely
on federal case law in interpreting the takings clause of the Minnesota Constitution. Wensmann
Realty v. City of Eagan, Inc., 734 N.W.2d 623, 631-32 (Minn. 2007).
“Because the concepts of fairness and justice that underlie the Takings Clause ‘are less
than fully determinate,’ the Supreme Court has ‘eschewed any set formula for determining when
justice and fairness require that economic injuries caused by public action be compensated by the
government.’” Wensmann, 734 N.W.2d at 632 (quoting Palazzolo v. Rhode Island, 533 U.S.
606, 633 (2001)). Consequently, “the determination of whether a taking has occurred is highly
fact-specific, depending on the particular circumstances underlying each case.” Westling v.
County of Mills Lake, 581 N.W.2d 815, 823 (Minn. 1998); see also Penn Central Transp. Co.,
438 U.S. at 124 (describing takings analyses as “ad hoc, factual inquiries”). For this reason,
claims under the Takings Clause are particularly unsuited for resolution before discovery has
occurred.
In Penn Central, the Supreme Court identified “several factors that have particular
significance” in the takings analysis. 438 U.S. at 124. “Primary among those factors are ‘[t]he
50
economic impact of the regulation on the claimant and, particularly, the extent to which the
regulation has interfered with distinct investment-backed expectations.’ In addition, the
‘character of the governmental action’ may be relevant in discerning whether a taking has
occurred.” Lingle v. Chevron U.S.A., Inc. 544 U.S. 528, 538-39 (2005) (quoting Penn Central,
438 U.S. at 124). The Penn Central approach is flexible, with several of the factors often being
balanced. E.g, Johnson v. City of Minnesota, 667 N.W.2d 109, 114 (Minn. 2003) (describing the
Penn Central framework as a “balancing test”). But the primary focus of the inquiry is on “the
severity of the burden that government imposes upon private property rights.” Lingle, 544 U.S.
at 539.
2. Retirees have a Protected Property Interest in the Postretirement Adjustment Formula in Effect at the Time of their Retirement.
The Takings Clause is addressed to “every sort of interest the citizen may possess.”
United States v. General Motors Corp., 323 U.S. 373, 378, (1945); see Florida Rock Industries
v. United States, 18 F.3d 1560, 1572 n. 32 (Fed.Cir.1994) (property interests “are about as
diverse as the human mind can conceive”). Here, Plaintiffs had a legitimate expectation that
they would receive annual pension increases at the levels specified under the law when they
retired. In a seminal law review written over four decades ago,22 former Yale Professor Charles
Reich described the role of pensions in a public employee’s life:
No form of government largess is more personal or individual than an old age pension. No form is more clearly earned by the recipient.... No form is more obviously a compulsory substitute for private property; the tax on wage earner and employer might readily have gone to higher pay and higher private savings instead. No form is more relied on, and more often thought of as property. No form is more vital to the independence and dignity of the individual.
22 In 1996, this article was found to be the fourth most-cited article among all law review articles ever published. See Fred R. Shapiro, “The Most-Cited Law Review Articles Revisited,” 71 Chicago-Kent L.R. 751, 760 (1996).
51
Charles A. Reich, “The New Property,” 73 Yale L.J. 733, 769 (1964).
Indeed, Minnesota’s courts have previously found that the promise of postretirement
monetary benefits is a term of the employment contract between a public employee and his or
her government employer that is constitutionally protected once the employee vests in the
benefits.23 Sylvestre, supra; Christensen, supra. Although these cases arose under the Contract
Clause, the analysis of whether a plaintiff has a requisite property right in his pension is the same
under the Contract Clause and the Takings Clause. Parella v. Retirement Bd. of Rhode Island
Employees’ Retirement System, 173 F.3d 46, 58-59 (1st Cir. 1999) (“The facts here require us to
consider whether plaintiffs had the requisite property right to support a Takings Clause claim by
analyzing their claim under the Contract Clause.”); Professional Firefighters Ass’n of Omaha,
2010 WL 2426446 at *5 (“cut in retiree health benefits violates Contract Clause and
also likely constitutes an unlawful taking, contrary to the plaintiffs’ rights under the Fifth
Amendment.”).
In their motion, Defendants argue that an alleged taking of money is not actionable under
the Takings clause. They are wrong. A taking of money can constitute a taking if the funds are
protected by a property right. The type of monetary taking here is akin to the unlawful takings in
Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998), in which the State of Texas kept
the interest earned on lawyer trust accounts (IOLTA), and in Webb’s Fabulous Pharmacies, Inc.
v. Beckwith, 449 U.S. 155 (1980), where state law permitted the clerk of each county court to
take money deposited by litigants with the court (e.g., in interpleader cases), invest them in
23 Defendants surely would not argue that Plaintiffs suffered no loss of property if, at retirement, the State gave Plaintiffs the actuarial value of their income stream in a lump sum, but then proceeded to take back the amount attributable to the value of the yearly increases. In substance, this is precisely what happened here.
52
interest-bearing accounts and keep the interest earned. As in these cases, Defendants have
invaded a specific, identifiable property interest -- here, the Retirement Systems’ trust accounts -
- which Class Members contributed to and which were set up to sustain them throughout
retirement. For public employees who contributed income to defined contribution pensions the
taking is even more obvious. They could have withdrawn their money but gave up that right in
exchange for the guarantee that a particular formula would be used for postretirement
adjustments.
The cases cited by Defendants on page 49 of their brief are simply not on point, as they
do not involve a taking of a specific fund of monies.
In Branch v. U.S., 69 F.3d 1571 (Fed. Cir. 1995), the Federal Circuit held that the seizure
of a bank’s assets by the federal government in order to offset losses to the Federal Bank
Insurance Fund by the failure of a sister bank was not a “Takings Clause” violation. The
Defendant cites Branch for the proposition that money and real property should be treated
differently in a constitutional analysis. Branch says nothing of the sort. The discussion of
“monetary liability” was merely to distinguish taxes and other assessments from unlawful
takings; not money from real property. Id. at 1574-76.
Similarly, in U.S. v. Sperry Corp., 493 U.S. 52 (1989), the Supreme Court did not hold
that the taking of money cannot constitute an unlawful taking. Sperry’s suit was based on a 2%
user fee that the federal government charged on Sperry’s prejudgment attachment against Iranian
assets that were awarded in a dispute in the Iran-United States Claims Tribunal. The issue was
not the imposition of a fee, but whether the government had to justify the size of the fee. The
Court held that the deductions “are not so clearly excessive as to belie their purported character
53
as user fees. This is not a situation where the Government has appropriated all, or most, of the
award to itself and labeled the booty as a user fee.” Id. at 62.
The discussion in Commonwealth Edison v. U.S., 46 Fed.Cl. 29 (Fed. Cl. 2000),
concerning the differences between money and real property, were all in relation to
indeterminate future obligations to pay money that were imposed on plaintiffs. (“[T]he courts
have generally held that a government-imposed obligation to pay ‘money’ is not susceptible to a
taking analysis.” Id. at 40.) In Commonwealth Edison, there was even a question of whether the
money the plaintiff company was required to pay would actually be paid by the company or the
customers. Id. at n.3. However, in order to clarify the precise nature of the court’s holding, the
Federal Circuit on appeal made clear the distinction between the assessment being litigated from
one in which a specific fund is involved, and stated that the taking of money from a specific fund
would constitute a taking. Commonwealth Edison, Co. v. U.S., 271 F.3d 1327, 1340 (2001) (“In
short, while a taking may occur when a specific fund of money is involved, the mere imposition
of an obligation to pay money, as here, does not give rise to a claim under the Takings Clause of
the Fifth Amendment.”).24
24 At p. 48, fn 25, of their brief, Defendants argue that a Takings claim is not appropriate because Plaintiffs allege that the state’s action was unreasonable, For this proposition, Defendants cite Nicholson v. United States, 77 Fed.Cl. 605, 614 (Fed. Cl. 2007), which was a tort action arising out of the Army Corps of Engineers’ failure to secure the levees prior to Katrina. The court says that you cannot allege a taking when you have a tort claim because the conduct forming the basis of a taking must be lawful -- the "takings claimants must concede the propriety of the governmental interference with their property interests.” Defendants are misreading Nicholson: Plaintiffs are not alleging that “the governmental conduct forming the basis of the taking”—the passing of the legislation—was illegitimate. That is, we are not arguing that the legislative PROCESS was illegal, but that the result was unconstitutional. If Nicholson were as broad as Defendants are arguing, virtually no one deprived of property could ever bring a 5th Amendment Takings suit.
54
E. Plaintiffs May Bring Claims Under 42 U.S.C. § 1983 Against The Individual Defendants For Injunctive Relief and Obtain Monetary Damages Against The Defendants Through A Direct Action Under The Federal Takings Clause.
Next, Defendants assert that Plaintiffs’ Section 1983 claims fail as a matter of law.
Defendants’ argument is not supported by governing case law.
First, Defendants misstate the law when they state that Section 1983 “claims against
individuals in their official capacities are claims against the state.” Def. Mem. at 52. Where, as
here, plaintiffs have sued for injunctive relief, official-capacity actions for prospective relief are
not treated as actions against the state. Will v. Michigan Dep’t of State Police, 491 U.S. 58, 71
n.10 (1989); Alsbrook v. City of Maumelle, 194 F.3d 999, 1010 n.19 (8th Cir. 1999) (citing Will).
State governors are frequently proper defendants in cases brought under Section 1983 that seek
injunctive relief. See, e.g., Burks v. Teasdale, 603 F.2d 59 (8th Cir. 1979) (prison overcrowding
case brought against Missouri Governor and state officials); Arkansas Day Care Ass'n, Inc. v.
Clinton, 577 F.Supp. 388 (D. Ark. 1983) (claim predicated on Establishment Clause). Thus,
Plaintiffs claims for injunctive relief brought under 42 U.S.C. § 1983 should not be dismissed.
Defendants also allege that “Plaintiffs’ Section 1983 claims for monetary damages
against the individual Defendants must be dismissed” but cite no grounds or any case for
support. See Def. Mem. at 52. With regard to their federal claims, Plaintiffs are not seeking
monetary damages under Section 1983 but through a direct action under the Takings Clause of
the federal Constitution. Unlike claims for monetary damages under Section 1983, the doctrine
of sovereign immunity does not protect a state government from a Fifth Amendment Takings
Claim because the constitutional mandate is “self-executing.” U.S. v. Clarke, 445 U.S. 253, 257
(1980); Manning v. N.M. Energy, Minerals & Natural Resources Dept., 144 P.3d 87 (N.M.
2006) (federal Takings Clause is self-executing as applied to the states) (same).
55
Because the federal Takings Clause is self-executing, plaintiffs can bring a direct claim
under the Takings Clause to obtain monetary damages from the Defendants and do not need to
utilize Section 1983.
F. Defendants’ Challenges to Plaintiffs’ Class Action Allegations Are Premature and Without Merit
It is unclear what the Defendants are asking the Court to do in the section of its
memorandum challenging Plaintiffs’ class action allegations as Plaintiffs have not yet moved for
class certification. Defendants claim that there are too many legal hurdles for Plaintiffs’
proposed class action treatment to succeed and that there is no legal impediment to dismissing
Plaintiffs’ claims before class certification is sought. However, they provide no rule or case
citations supporting those propositions or giving Plaintiffs insight into just what the Defendants
are arguing.
Defendants then proceed with a series of pot shots aimed at various elements Plaintiffs
will establish when they make their motion for class certification. Since it appears that the
Defendants’ goal is to cast doubt on the viability of litigating these claims on behalf of a class,
Plaintiffs respond by showing generally why their class claims are eminently suited to class
treatment and how the Defendants’ criticisms completely miss the mark.
When Plaintiffs move for class certification they will first show that the elements of Rule
23.01 are met: numerosity, commonality, typicality and adequacy.
They will first show that the class, numbering approximately 130,000 persons, Amended
Complaint at ¶ 20, is so large that joinder of all members is impracticable, thereby satisfying the
numerosity element.
56
Next, Plaintiffs will also meet the “commonality” element. A class satisfies the
commonality requirement when “there are questions of law or fact common to the class.” This
“requires only that the resolution of the common questions affect all or a substantial number of
class members.” Streich v. American Family Mut. Ins. Co., 399 N.W.2d 210, 214 (Minn. Ct.
App. 1987). Here common questions abound. They include but are not limited to:
• whether the class members have a protectable contract interest in the postretirement adjustment formula (or its equivalent) in effect at the time they began receiving benefits
• whether a breach of that contract constitutes a substantial impairment that violates
the federal and state constitutions • whether the impairment of that contract or promise was justified by the
circumstances • whether the legislation at issue constitutes an unconstitutional takings • what injunctive and monetary remedies are appropriate
This is the type of case that is particularly suited to class adjudication because a single set of
government actions had a dramatic negative impact on a very large group of state retirees.
“The ‘typicality’ requirement is met when the claims of the named plaintiffs arise from
the same event or are based on the same legal theory as the claims of the class members. . . . A
‘strong similarity of legal theories’ satisfies the typicality requirement even if substantial factual
differences exist.” Glen Lewy 1990 Trust v. Investment Advisors, Inc., 650 N.W.2d 445 (Minn.
Ct. App. 2002). The claims of the named plaintiffs and the class members are based on the same
events, passage of the 2009 and 2010 legislation, and the same legal theories, breach of contract
and takings. Defendants state without any supporting detail that some class members’ annuities
may not increase if plaintiffs succeed. Numerous cases in which benefit plan participants have
challenged benefit cuts have been certified as proper class actions, regardless of the fact that
57
differing amounts of monetary relief would result from the requested declaration of rights. See.
e.g., Smith v. United HealthCare, 2002 WL 192565, *4-5 2140 (D.Minn. Feb. 5, 2002).
Similarly, the “adequacy” requirement means that “plaintiffs’ interests must coincide
with the interests of other class members.” Ario v. Metropolitan Airports Comm’n, 367 N.W.2d
509, 513 (Minn. 1985). The Plaintiffs have no unique set of claims that sets them apart from the
class or creates “any interests that conflict with the objective of the class they represent.” Glen
Lewy, 650 N.W.2d at 454.
Defendants claim that the class mechanism is not necessary if injunctive relief is
requested. Yet one of the Rule 23.02 maintainability factors is whether: “the party opposing the
class has acted or refused to act on grounds generally applicable to the class, thereby making
appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a
whole.” Minn. R. Civ. P. 23.02(b). Rule 23 places a special obligation on the Court to protect
the interests of the class as a whole and to keep those interests in mind when fashioning or
approving relief. MANUAL FOR COMPLEX LITIGATION (FOURTH) § 21 (2004) (“The court must
protect the interests of absent class members, and Rule 23(d) [equivalent to Minn. R. Civ. P.
23.04] gives the judge broad administrative powers to do so, reflecting the equity origins of class
actions.”). Accordingly, if it is found that the conduct at issue in this case is illegal, the Court
will have authority to determine what relief is appropriate under the circumstances and no doubt
will work with the Plaintiffs and Defendants in reaching an appropriate result.
Finally, assuming that some monetary injury has occurred or will occur as a result of the
challenged conduct, Defendants’ claim that damages calculations would be unmanageable is
groundless. Def. Mem. at 53. Just as the pension plans manage the postretirement increases
each year by applying a formula to the current benefit amount, Plaintiffs anticipate that a similar
58
formula can be employed to make the class whole. And even if damages did require a more fact
intensive analysis, such individualized damages do not necessarily undercut manageability. See,
e.g., Rathbun v. W.T. Grant Co., 219 N.W.2d 641, 652 (Minn. 1974) (affirming class action
requiring individualized damages because “the predominance of a common issue of liability over
individual questions of damages has been frequently recognized”).
No doubt, arguments can and will be made for and against class treatment when Plaintiffs
file their motion for certification under Rule 23. But the “legal hurdles” that Defendants claim
should discourage the Court from proceeding with this litigation simply do not exist. To the
contrary, the class action mechanism provides a controlled, orderly and fair means of fashioning
appropriate relief for individuals who alone would find it extremely difficult, if not impossible to
challenge this government action.
V. CONCLUSION
For all of the above reasons, Plaintiffs respectfully request the Court to deny Defendants’
Motion for Summary Judgment in its entirety, or in the alternative, continue its decision to allow
a reasonable period of time for Plaintiffs to engage in discovery.
59
Dated September 7, 2010. HALUNEN & ASSOCIATES
_________________________ Susan M. Coler (#217621) Clayton D. Halunen (#219721) Halunen & Associates 1650 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Telephone: (612) 605-4098 Facsimile: (612) 605-4099
William T. Payne (admitted pro hac vice) Stephen M. Pincus (admitted pro hac vice) Stember Feinstein Doyle Payne & Cordes, LLC Allegheny Building, 17th Floor 429 Forbes Avenue Pittsburgh, PA 15219 Telephone: (412) 281-8400 Facsimile: (412) 281-1007
STATE OF MINNESOTA COUNTY OF RA1\1SEY
Ho'ward Swanson and Latnbert Niesen,
Plaintiffs,
vs.
State of 11il1nesota, Public Enlployees' . Retiienlent Association of Minnesota, l\1innesota State Retirenlent SysteIn, Teachers Retireinent Association of Mitmesota, Governor Tiin Pawlenty (in bis official capacity), Th01nas L. 11arsha11 (in his official capacity), Mary Most Vanek (in her official capacity), 11ary Breluler (in her official capacity), David Bergstrom (in his official capacity), Martha Lee Zins (in her official capacity), and Laurie Fiori Hacking (in her official capacity),.
Defendants.
STATE OF MINNESOTA ) ) ss
COUNTY OF HENNEPIN )
DISTRICT COURT SECOND JUDICIAL DISTRICT
Court File No. 62-CV-IO-5285 The Honorable Dale B, Lindlnan
AFFIDAVIT OF SERVICE VIA MESSENGER
Aurora Thonle, being fust duly sworn, upon oath deposes and says that on the 7th day of Septelnber, 2010, she served via 11essenger one copy, of Plaintiffs' l\(.[elnorandum in Opposition to Defendants' 110tion for SUlmnary Judgment, Affidavit of Claude PoulinviTith Exhibits A and B, and Affidavit .of Susan 11. Coler with Exhibits 1 through 25 and 'Sun111lalY Exhibits 1 through 4 itl an' envelop~ addressed to: '
Rita Coyle. Del\1eules 'l\1uulesota Attoll1eyGenerl;l1's Office Assistant Att0111ey General Tax Litigation
. BreIner TO'wer, Suite 900 445 l\1i1ulesota Street
St~51~
Aurora Tholne