173 F.3d 46 (1st Cir. 1999), 98-1400, Parella v. Retirement Bd. of Rhode Island Employees' Retirement System

Docket Nº:98-1400.
Citation:173 F.3d 46
Party Name:Gaetano PARELLA, et al., Plaintiffs, Appellees, v. RETIREMENT BOARD OF THE RHODE ISLAND EMPLOYEES' RETIREMENT SYSTEM, Nancy J. Mayer, in her official capacities as General Treasurer of the State of Rhode Island and as Chairperson, Treasurer, and Custodian of Funds of the Retirement Board of the Rhode Island Employees' Retirement System, and Joann E
Case Date:April 16, 1999
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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173 F.3d 46 (1st Cir. 1999)

Gaetano PARELLA, et al., Plaintiffs, Appellees,

v.

RETIREMENT BOARD OF THE RHODE ISLAND EMPLOYEES' RETIREMENT

SYSTEM, Nancy J. Mayer, in her official capacities as

General Treasurer of the State of Rhode Island and as

Chairperson, Treasurer, and Custodian of Funds of the

Retirement Board of the Rhode Island Employees' Retirement

System, and Joann E. Flaminio, in her official capacity as

Executive Director of the Retirement Board of the Rhode

Island Employees' Retirement System, Defendants, Appellants.

No. 98-1400.

United States Court of Appeals, First Circuit

April 16, 1999

Heard Sept. 18, 1998.

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[Copyrighted Material Omitted]

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Michael P. DeFanti, with whom Laura A. Pisaturo and Hinckley, Allen & Snyder were on brief, for appellants Retirement Board of the Rhode Island Employees' Retirement System and Joann E. Flaminio, in her official capacity as Executive

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Director of the Retirement Board of the Rhode Island Employees' Retirement System.

Rebecca T. Partington, Assistant Attorney General, for appellant Nancy J. Mayer, in her official capacity as General Treasurer of the State of Rhode Island.

Anthony F. Muri, with whom Barbara S. Cohen and Goldenberg & Muri were on brief, for appellees Gaetano Parella et al.

Before BOUDIN, LYNCH, and LIPEZ, Circuit Judges.

LYNCH, Circuit Judge.

Beginning in 1987, retired Rhode Island legislators or their beneficiaries became eligible to receive annual pension benefits that were as much as sixty times greater than the legislators' annual pre-retirement salaries. When the Rhode Island General Assembly became aware that the generosity of these benefits jeopardized the tax-exempt status of the state's retirement system, it acted to bring the benefits into compliance with federal tax law by capping annual benefits at $10,000, effective July 1995. The pensioners whose benefits were thereby reduced brought suit under 42 U.S.C. § 1983 to foreclose any withholding of benefits, alleging that the benefit cap violated the Takings Clause, Contract Clause, and Due Process Clause of the United States Constitution.

While the suit was pending, Congress retroactively eliminated the federal tax code's limitations on government pensions, and the Rhode Island Retirement Board responded by refunding the withheld benefits. The pensioners then continued their suit in order to seek interest on the benefits for the time that they were withheld, as well as attorneys' fees under 42 U.S.C. § 1988. After cross-motions for summary judgment, the district court granted summary judgment to the pensioners on Takings Clause grounds, and this appeal followed.

Because of the peculiar fact pattern of this case, it raises a number of difficult constitutional issues, including several questions related to defendants' asserted Eleventh Amendment defense. We conclude that Rhode Island's temporary withholding of excess benefits did not violate the pensioners' constitutional rights; accordingly, we do not reach the other issues. We reverse the district court's grant of summary judgment on the pensioners' § 1983 claim, vacate its award of costs and attorneys' fees under § 1988, and remand for entry of summary judgment in favor of defendants.

I

Summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. See Fed.R.Civ.P. 56(c). The district court based its order on the following undisputed facts.

In 1936, the Rhode Island General Assembly enacted legislation establishing a retirement system for public employees. See 1936 R.I. Pub. Laws ch. 2334 (codified as amended at R.I. Gen. Laws § 36-8-1 et seq.); see also National Educ. Ass'n--Rhode Island v. Retirement Bd. of the R.I. Employees' Retirement System, 172 F.3d 22 (1st Cir.1999) ("NEA ")(describing system's history); Kass v. Retirement Bd. of the Employees' Retirement Sys., 567 A.2d 358, 358-59 (R.I.1989) (same); McGrath v. Rhode Island Retirement Bd., 88 F.3d 12, 13-14 (1st Cir.1996) (describing related municipal pension plan). The Rhode Island retirement system is a defined benefit plan, which requires members to contribute a set percentage of their yearly salary, see R.I. Gen. Laws § 36-10-1, in exchange for a fixed retirement allowance based on years of service and salary level achieved, see id. § 36-10-10. The retirement system is administered by a retirement board ("the Board"), which is chaired by the state treasurer. See id. §§ 36-8-3, 36-8-9.

The original provisions of the retirement statute expressly excluded members of the

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General Assembly from participating in the retirement system. See 1936 R.I. Pub. Laws ch. 2334, § 14. In 1947, the Assembly amended the statute to permit legislators to join the system voluntarily. See 1947 R.I. Pub. Laws ch.1971, § 5 (codified as amended at R.I. Gen. Laws § 36-9-6). At first, legislator contributions and benefits were based on the same rates set for ordinary employee members. See id. ch.1971, § 3. Since at that time legislators' compensation was limited by the Rhode Island Constitution to $300 per year, see R.I. Const. art. VI, § 3 (amended 1994), legislative pensions were extremely small. Beginning in 1960, however, a series of amendments to the retirement statute increased both the rate of contribution for legislators and their maximum annual pension benefit. See Kass, 567 A.2d at 362-63, 364. In 1987, legislators granted themselves the last such increase. After voters rejected a proposed amendment to the Rhode Island Constitution that would have increased the nominal $300 salary, legislators acted to double their maximum pension benefit, to $12,000 annually, without altering the annual premium (by then set at $90, or thirty percent of the annual $300 salary). See R.I. Gen. Laws § 36-10-10.1(a). The increase applied both retrospectively (to those already retired in 1987) and prospectively. See id. § 36-10-10.1(c).

As a result of this increase, the Rhode Island retirement system no longer qualified as a tax-exempt pension plan under Internal Revenue Code § 401(a) because it was out of compliance with § 415(b), which then limited annual pension benefits to either $10,000 or the retiree's annual pre-retirement compensation, whichever was greater. 1 See 26 U.S.C. §§ 401(a), 415(b) (retroactively amended in 1996). Both the General Assembly and the Board appear to have been happily unaware of this problem until 1991, when local journalists brought it to their--and the Internal Revenue Service's--attention.

The problem was a significant one. If the IRS decided to strictly enforce the § 415(b) limit, then the retirement fund would need to pay taxes on its investment profits for each year in which the plan exceeded § 415 limits. That, in turn, would put more of the burden for financing the state's pension obligations on taxpayers. Individual members of the system could also suffer, since they would be responsible for annual taxes on the value of any non-forfeitable accrued benefits. See 6 Mertens, Law of Federal Income Taxation § 25B:01, at 25B-7 (Sept.1998) (describing tax consequences for participants in a non-qualified pension plan).

After negotiating with the IRS, the state agreed in early 1994 to pass legislation capping past and present legislative pensions at $10,000. See 1994 R.I. Pub. Laws ch. 87 ("Cap Act") (codified at R.I. Gen. Laws § 36-8-20 and § 36-10-10.1). The Cap Act added a new section to the retirement statute to declare the state's general intention "that the retirement system satisfy the requirements of § 401(a) of the Internal Revenue Code." R.I. Gen. Laws § 36-8-20(a). Section 36-8-20 also included a number of specific provisions intended to ensure compliance with Code requirements, including a section providing that "[b]enefits shall not be payable to the extent that they exceed the limitations imposed by § 415 of the code." Id. § 36-8-20(f). Another section of the Cap Act explicitly limited legislative pensions to $10,000, effective July 1995:

If a [retired legislator] is entitled under subsection (a) of this section to an annual retirement allowance which is in excess of the amount permitted by § 415(b)(4) of the Internal Revenue

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Code, ... the amount in excess of ten thousand dollars ($10,000):

. . . . .

... [s]hall be paid from the retirement system after June 30, 1995, only to the extent permitted by the limitation on benefits imposed by § 36-8-20 [ (f) ] [which in turn permits no benefits in excess of Code § 415].

Id. § 36-10-10.1(e)(1). The Cap Act provided further that "[a]ny amount not permitted to be paid by the retirement system ... shall be paid out of general funds, but only to the extent that amounts have been appropriated for those payments." Id. § 36-10-10.1(e)(2). 2

After the General Assembly chose not to appropriate the funds required in 1995 to replace the excess benefits, the Board began reducing monthly payments to each pensioner whose annual benefits exceeded $10,000. The reductions were quite substantial: pensioners who had been receiving the highest pensions (in excess of $18,000 3) lost nearly forty-five percent of their benefits, and collectively the reductions for 1995 totaled nearly $700,000.

The plaintiffs, a class of 171 retired legislators or their spouses who had been receiving pensions in excess of $10,000 annually, brought suit against the Board to recover the withheld amounts, naming as additional defendants Nancy Mayer, in her official capacities as Chair of the Board and as Treasurer of Rhode Island, and Joann Flaminio, in her official capacity as Executive Director of the Board. The pensioners alleged that the Cap Act as applied violated the Takings Clause, Contract Clause, and Due Process Clause and that each of the defendants had violated 42 U.S.C. §...

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