Faulkenbury v. Teachers' and State Employees' Retirement System of North Carolina
| Decision Date | 11 April 1997 |
| Docket Number | No. 109PA96,109PA96 |
| Citation | 345 N.C. 683,483 S.E.2d 422 |
| Court | North Carolina Supreme Court |
| Parties | , 117 Ed. Law Rep. 356 Dorothy M. FAULKENBURY, on behalf of herself and all others similarly situated, Plaintiffs, v. TEACHERS' AND STATE EMPLOYEES' RETIREMENT SYSTEM OF NORTH CAROLINA, a corporation; Board of Trustees and State Employees' Retirement System of North Carolina, a body politic and corporate; Dennis Ducker, Director of the Retirement System Divisions and Deputy Treasurer of the State of North Carolina (in his official capacity); Harlan E. Boyles, Treasurer of the State of North Carolina and Chairman of the Board of Trustees Teachers' and State Employees' Retirement System of North Carolina (in his official capacity); and State of North Carolina, Defendants. William H. WOODARD, on behalf of himself and all others similarly situated, Plaintiffs, v. NORTH CAROLINA LOCAL GOVERNMENTAL EMPLOYEES' RETIREMENT SYSTEM, a corporation; Board of Trustees of the North Carolina Local Governmental Employees' Retirement System, a body politic and corporate; Dennis Ducker, Director of the Retirement System Divisions and Deputy Treasurer of the State of North Carolina (in his official capacity); Harlan E. Boyles, Treasurer of the State of North Carolina and Chairman of the Board of Trustees of the North Carolina Local Governmental Employees' Retirement System (in his official capacity); State of North Carolina, Defendants. Bonnie G. PEELE, on behalf of herself and all others similarly situated, Plaintiffs, v. TEACHERS' AND STATE EMPLOYEES' RETIREMENT SYSTEM OF NORTH CAROLINA, a corporation; Board of Trustees Teachers' and State Employees' System of North Carolina, a body politic and corporate; Dennis Ducker, Director of the Retirement System Divisions and Deputy Treasurer of the State of North Carolina (in his official capacity); Harlan E. Boyles, Treasurer of the State of North Carolina and Chairman of the Board of Trustees Teachers' and State Employees' Retirement System of North Carolina, (in his official capacity); and State of North Carolina, Defendants. |
Michael F. Easley, Attorney General by Edwin M. Speas, Jr., Senior Deputy Attorney General, and Norma S. Harrell, and Tiare Bowe Smiley, Special Deputy Attorneys General, for defendant-appellants and -appellees.
The principal question raised by this appeal is whether a change in the law, which reduced plaintiffs' disability retirement payments, violates Article I, Section 10 of the Constitution of the United States, which provides in part: "No state shall ... pass any ... law impairing the obligations of contracts." U.S. Const. art. I, § 10. In order to resolve this question, we must first determine whether there was a contract. If there was a contract, we must determine whether the contract was impaired. Finally, we must determine whether the impairment was reasonable and necessary to serve an important public purpose. United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977).
The Court of Appeals held and we affirmed in Simpson v. N.C. Local Gov't Employees' Retirement Sys., 88 N.C.App. 218, 363 S.E.2d 90 (1987), aff'd per curiam, 323 N.C. 362, 372 S.E.2d 559 (1988), a case almost on all fours with this case, that the relation between the employees and the governmental units was contractual. Simpson governs this case. At the time the plaintiffs' rights to pensions became vested, the law provided that they would have disability retirement benefits calculated in a certain way. These were rights that they had earned and that may not be taken from them by legislative action.
The defendants argue Simpson is wrong and should be overruled. They say this is so because the statutes upon which the plaintiffs rely are not promises, but only state a policy which the General Assembly may change. We believe that a better analysis is that at the time the plaintiffs started working for the state or local government, the statutes provided what the plaintiffs' compensation in the way of retirement benefits would be. The plaintiffs accepted these offers when they took the jobs. This created a contract.
The defendants next contend that the General Assembly reserved the right to amend the retirement plans for state and local government employees by N.C.G.S. §§ 128-38 and 135-18.4, which provide:
The General Assembly reserves the right at any time and from time to time, and if deemed necessary or appropriate by said General Assembly in order to coordinate with any changes in the benefit and other provisions of the Social Security Act made after January 1, 1955, to modify or amend in whole or in part any or all of the provisions of the ... Retirement System.
N.C.G.S. § 128-38 (1995) (local government employees); N.C.G.S. § 135-18.4 (1995) (state government employees).
The two sections only allow amendments to coordinate the retirement system with the Social Security Act. They have no application to this case.
The defendants, citing cases from other states and legal articles, say the General Assembly did not originally reserve the right to change the retirement benefits because at the time the plans were created, the General Assembly considered retirement benefits to be gratuities. We believe this argument is refuted by the first case in this state, Bridges v. City of Charlotte, 221 N.C. 472, 20 S.E.2d 825 (1942), in which the constitutionality of the Teachers' and State Employees' Retirement Act was challenged. We held that pensions for teachers and state employees were delayed salaries. If they were gratuities, we said, they would run afoul of proscription of special emoluments as provided in our state Constitution.
The defendants argue that there is nothing in the statutes that shows the General Assembly intended to offer the benefits as a part of a contract, and without such an intent, there can be no contract. We believe that when the General Assembly enacted laws which provided for certain benefits to those persons who were to be employed by the state and local governments and who fulfilled certain conditions, this could reasonably be considered by those persons as offers by the state or local government to guarantee the benefits if those persons fulfilled the conditions. When they did so, the contract was formed. For a discussion on the objective and subjective theories in determining the intent to form a contract, see E. Allan Farnsworth, Contracts § 3.6, at 113 (1st ed. 1982).
The defendants contend that the plaintiffs do not have vested rights to disability compensation at the pre-1 July 1982 level because they were not disabled on that date. They say that the plaintiffs' rights to disability retirement benefits did not vest until the plaintiffs were disabled, at which time the benefits had been reduced. We believe a better analysis is that, pursuant to the plaintiffs' contracts, they were promised that if they worked for five years, they would receive certain benefits if they became disabled. The plaintiffs fulfilled this condition. At that time, the plaintiffs' rights to benefits in case they were disabled became vested. The defendants could not then reduce the benefits.
The defendants argue that Griffin v. Board of Comm'rs, 84 N.C.App. 443, 352 S.E.2d 882 (1987), is inconsistent with Simpson and the Court of Appeals' opinion in this case. We agree. So far as Griffin is inconsistent with this case, it is overruled.
The defendants next argue that Simpson has never been considered in equitable distribution cases when determining whether pensions are vested, and pensions are thus marital property. Equitable distribution has no application to this case.
The defendants contend that the power to determine the amount of pension payments is a part of the essential attributes of sovereign power necessary to safeguard the vital interests of the people. These are powers of a state which cannot be "bargained away," say the defendants. A state can normally enter into a financial obligation. United States Trust Co., 431 U.S. at 21, 97 S.Ct. at 1517, 52 L.Ed.2d at 109. The promise to pay pensions does not bargain away a power of the state or local government necessary to protect the vital interests of the people.
The defendants next argue that assuming there were contractual relationships in regard to the pension rights of the plaintiffs, there has not been a showing that the plaintiffs' contractual rights have been impaired. The defendants say this is so because the plaintiffs have received what they reasonably expected from the contracts. Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 103 S.Ct. 697, 74 L.Ed.2d 569 (1983). The defendants say the evidence showed that the plaintiffs did not read the handbooks provided them, which explained their pension rights, and made no inquiries about these rights until they retired. For this reason, say the defendants, the plaintiffs had no particular expectations in regard to disability payments except that they would receive what the pension plan provided for them. The plaintiffs expected to receive what they were promised at the time of vesting. They may not have known the exact amount, but this was their expectation. The contract was substantially impaired when the promised amount was taken from them.
The defendants next argue that the retirement benefits were not the central undertakings of the contracts. They say that the service-retirement benefits were what was bargained for by the plaintiffs, and because the plaintiffs are receiving the equivalent of service-retirement benefits, their rights under the contracts have not been impaired. We disagree. Whatever may have been the central undertaking of the contracts, the retirement benefits were an integral part. The plaintiffs are entitled to have this part enforced.
The defendants next argue that there was no proof that any members of the classes represented by the plaintiffs suffered any impairment...
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