Cherry v. Mayor

Decision Date16 August 2021
Docket NumberNo. 36, Sept. Term, 2020,36, Sept. Term, 2020
Citation257 A.3d 1087,475 Md. 565
CourtCourt of Special Appeals of Maryland

Argued by Charles O. Monk, II (Paul M. Heylman, Geoffrey M. Gamble and Kayleigh T. Keilty, Saul Ewing Arnstein & Lehr LLP, Baltimore, MD; Dwight W. Stone, III, Miles and Stockbridge, Baltimore, MD) and Robert D. Klausner (Klausner, Kaufman, Jensen & Levinson, Plantation, FL), on brief, for Appellants/Cross-Appellees.

Argued by James P. Ulwick and Jean E. Lewis (Louis P. Malick, Kramon & Graham, P.A., Baltimore, MD), on brief, for Appellee/Cross-Appellant.

Argued before: Barbera, C.J.; McDonald, Watts, Hotten, Getty, Booth and Biran, JJ.

Biran, J.

Over the course of time, governing bodies of large cities face many challenges. One such challenge that some cities and other local governments may confront is how to change a public pension plan that is actuarially unsound. Often, the public employees who participate in these plans are represented by unions that register legitimate objections to proposed modifications. Taking such action in the face of opposition by public employees can be difficult politically. The challenge is magnified when the city is in dire financial straits. In such a situation, the city may have to choose between the lesser of two evils: change the plan without the consent, and to the consternation, of employees who have devoted their careers to public service; or keep the plan as is and put the city deeper into debt, perhaps even risking financial ruin. In 2010, Baltimore City faced this choice.

Baltimore City maintains a Fire and Police Employees’ Retirement System (the "Plan") to provide pension benefits to uniformed officers in the City's police and fire departments. The statute governing the Plan provides that a contractual relationship exists between Plan members and the City, and that the benefits provided under the Plan "shall not thereafter be in any way diminished or impaired." Balt. City Code, art. 22, § 42 (2009). In June 2010, facing a perfect storm of financial challenges, the City enacted Ordinance 10-306 by which the City changed some of the key terms of the Plan to make it actuarially sound. Most notably, it replaced a variable post-retirement cost-of-living adjustment that was based entirely on the investment performance of Plan assets with a guaranteed, tiered cost-of-living adjustment that is not market-driven.

On behalf of themselves and others similarly situated, several City police officers and firefighters filed a class action lawsuit against the Mayor and City Council of Baltimore in the United States District Court for the District of Maryland. After the federal court directed the plaintiffs to refile their state law claims in state court, the plaintiffs commenced a class action lawsuit in the Circuit Court for Baltimore City, alleging claims for declaratory relief and breach of contract. Eventually, the circuit court (the Honorable Julie R. Rubin) certified a class of plaintiffs (the Appellants/Cross-Appellees here) and three sub-classes: Plan members who retired from service before the enactment of Ordinance 10-306 (the "Retired Sub-class"); currently employed members who had reached eligibility to retire but who had not yet retired (the "Retirement-Eligible Sub-class"); and currently employed members who had not yet reached retirement eligibility (the "Active Sub-class").

After a bench trial, the circuit court ruled that the City breached its contract with the Retired and Retirement-Eligible Sub-classes, finding that Ordinance 10-306 retrospectively divested the members of those sub-classes of benefits they had earned. The court awarded more than $30 million in damages to members of the Retired and Retirement-Eligible Sub-classes. However, the circuit court found no breach of the City's contract with the Active Sub-class, ruling that, as to the Active members, Ordinance 10-306 did not affect vested benefits, but rather made permissible prospective changes to the Plan.

Finding no factual or legal errors in the circuit court's rulings, we affirm its judgment in all respects.

A. The City's Fire and Police Employees’ Retirement System (The Plan)1

Article II, Section 26 of the Baltimore City Charter authorizes the City to "establish and maintain a system of pensions and retirement benefits" for officers and employees of the Baltimore Police and Fire Departments. Balt., Md., Charter art. II, § 26. In 1962, the City established the current version of its pension plan for police officers and firefighters – the Plan – to be managed by a Board of Trustees (the "Board" or the "Trustees"). Balt. City Code, art. 22, §§ 29, 33(a) (2009). The Plan's terms and benefits are set forth in Article 22 of the Baltimore City Code ("Article 22").2 Changes to the Plan may only be made by legislation passed by the City Council and signed into law by the Mayor.

Section 42 of Article 22 provides that, upon becoming a member of the Plan, the member

shall thereupon be deemed to have entered into a contract with the Mayor and City Council of Baltimore, the terms of which shall be the provisions of this Article 22, as they exist at the effective date of this ordinance, or at the time of becoming a member, whichever is later, and the benefits provided thereunder shall not thereafter be in any way diminished or impaired.

The Plan covers all uniformed officers of the Baltimore Police and Fire Departments, as well as certain other public safety workers. Under the Plan, there are three categories of retirement benefits eligibility: Service Retirement, Non-Line-of-Duty Disability Retirement, and Line-of-Duty Disability Retirement. Participation in the Plan by covered workers is mandatory during their employment. Prior to July 1, 2003, Service Retirement eligibility required members to reach 50 years of age or accrue 20 years of service. For membership beginning on or after July 1, 2003, members were eligible for Service Retirement when they reached 50 years of age with 10 years of service as a contributing member, or accrued 20 years of creditable service with 10 years of service as a contributing member. In the years just prior to the passage of Ordinance 10-306, Active members contributed 6% of their regular annual compensation to the Plan.

Section 36 of Article 22 lists four funds that are used to hold Plan assets and from which basic benefits are paid: (i) the Annuity Savings Fund ("ASF"); (ii) the Annuity Reserve Fund ("ARF"); (iii) the Pension Accumulation Fund ("PAF"); and (iv) the Pension Reserve Fund ("PRF"). Id. § 36(a)(1). The ASF, ARF, and PRF all are housed within the PAF.

The ASF "consists of the assets for each member's annuity portion of the member's retirement benefit." Id. § 36(b)(1). In other words, the ASF contains member contributions for Active members. Id. § 36(b)(2). Under § 36(b)(4), the Board of Trustees transfers a member's accumulated contributions3 from the ASF to the ARF upon the member's retirement. The ARF serves as the fund from which shall be paid all annuities4 and all benefits in lieu of annuities, payable as provided in § 36. In short, the ARF contains retired members’ contributions.

Section 36(d) defines the PAF, including how it is funded and maintained:

The Pension Accumulation Fund shall be the fund in which shall be accumulated all reserves for the payment of all pensions and other benefits payable from contributions made by the City of Baltimore and from which shall be paid all pensions and other benefits on account of members with prior service credit and lump sum death benefits for all members payable from the said contributions.

Id. § 36(d)(1).

Under § 36(e), the PRF is "the fund from which the pension is paid to members not entitled to credit for prior service and benefits in lieu thereof." When a member not entitled to credit for prior service5 retires, "an amount equal to that member's pension reserve shall be transferred from the Pension Accumulation Fund to the Pension Reserve Fund." Id. § 36(d)(7).

Section 36 requires that the City make annual contributions to the Plan. The City's annual contribution to the Plan consists of two primary components: for the preceding fiscal year, (1) "a certain percentage of the earnable compensation of each member to be known as the ‘normal contribution,’ " and (2) "an additional percentage of [the member's] earnable compensation to be known as the ‘accrued liability contribution.’ " Id. § 36(d)(2). Section 36(d)(5) describes the City's annual contribution requirement with further reference to the two components:

The required contribution by the City of Baltimore is the amount equal to the normal cost, plus the accrued liability contribution or less the amortization of the excess assets, as the case may be. However, the aggregate payment by the City must be sufficient, when combined with the amount in the fund, to provide the pensions and other benefits payable out of the [PAF] during the then-current year.

Id. § 36(d)(5).

Section 37 provides that "[t]he creation and maintenance of reserves in the [PAF], the maintenance of annuity reserves and pension reserves as provided for, and regular interest creditable to the various funds as provided in § 35(b) of this subtitle and the payment of all pensions, annuities, retirement allowances, refunds and other benefits granted under the provisions of this subtitle and all expenses in connection with the administration and operation of this Retirement System are hereby made obligations of the City of Baltimore."

Section 33(m) requires an actuary, designated by the Board of Trustees, to serve as "the technical adviser of the Board of Trustees on matters regarding the operation of the funds" of the Plan. Responsibilities of the actuary include: conducting an actuarial investigation at least once every five years to assess and value the Plan's assets and liabilities and "certify" Plan member and City contribution...

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