Fields v. Elected Officials' Ret. Plan

• Decision Date: 20 February 2014
• Docket Number: No. CV–13–0005–T–AP.,CV–13–0005–T–AP.
• Citation: 680 Ariz. Adv. Rep. 15,320 P.3d 1160,234 Ariz. 214
• Parties: The Honorable Kenneth FIELDS (ret.), a retired state court judge; and The Honorable Jefferson Lankford (ret.), a retired state court judge, on behalf of themselves and others similarly situated, Plaintiffs/Appellees, v. The ELECTED OFFICIALS' RETIREMENT PLAN; Brian Tobin; Richard Petrenka; Gregory Ferguson; Lauren Kingry; Jeff McHenry; and Randie Stein, are all named in their official capacities as Members of the Board of Trustees of the Elected Officials Retirement Plan of the State of Arizona; and The State of Arizona, Defendants/Appellants.
• Court: Arizona Supreme Court

234 Ariz. 214

320 P.3d 1160

680 Ariz. Adv. Rep. 15

The Honorable Kenneth FIELDS (ret.), a retired state court judge; and The Honorable Jefferson Lankford (ret.), a retired state court judge, on behalf of themselves and others similarly situated, Plaintiffs/Appellees,

v.The ELECTED OFFICIALS' RETIREMENT PLAN; Brian Tobin; Richard Petrenka; Gregory Ferguson; Lauren Kingry; Jeff McHenry; and Randie Stein, are all named in their official capacities as Members of the Board of Trustees of the Elected Officials Retirement Plan of the State of Arizona; and The State of Arizona, Defendants/Appellants.

No. CV–13–0005–T–AP.

Supreme Court of Arizona.

Feb. 20, 2014.

Colin F. Campbell, Sharad H. Desai, Thomas L. Hudson (argued), Osborn Maledon PA, Phoenix, for Kenneth Fields and Jefferson Lankford.

Bennett Evan Cooper, Shannon E. Trebbe, Steptoe & Johnson, LLP, Phoenix, for Elected Officials Retirement Plan, Brian Tobin, Richard Petrenka, Gregory Ferguson, Lauren Kingry, Jeff McHenry, and Randie Stein.

Thomas C. Horne, Arizona Attorney General, Charles A. Grube, Assistant Attorney General (argued), Arizona Attorney General's Office, Phoenix, for State of Arizona.

Gregrey G. Jernigan, Office of the President, Arizona State Senate, Phoenix, for Amicus Curiae Andy Biggs.

Peter A. Gentala, Pele K. Peacock, Office of the Speaker, Arizona House of Representatives, Phoenix, for Amicus Curiae Andrew M. Tobin.

William F. Bock, General Counsel, League of Arizona Cities and Towns, Phoenix, for Amicus Curiae League of Arizona Cities and Towns.

Joseph Sciarrotta, Jr., General Counsel, Office of Governor Janice K. Brewer, Phoenix,for Amicus Curiae Governor Janice K. Brewer.

Robert D. Klausner, Adam P. Levinson, Klausner, Kaufman, Jensen & Levinson, Plantation, FL, and Ron L. Kilgard, Keller Rohrback PLC, Phoenix, for Amicus Curiae National Conference on Public Employee Retirement Systems.

Justice BRUTINEL authored the opinion of the Court, in which Chief Justice BERCH, Vice Chief Justice BALES, Justice PELANDER, and Justice TIMMER joined.

Justice BRUTINEL, opinion of the Court.

¶ 1 Arizona Revised Statutes Section 38–818 establishes a formula for calculating pension benefit increases for retired members of the Elected Officials' Retirement Plan (“Plan”). In 2011, the legislature modified that formula by enacting Senate Bill (“S.B.”) 1609. Because that statute diminishes and impairs the retired members' benefits, we hold that it violates the Pension Clause of Article 29, § 1(C) of the Arizona Constitution.

I.

¶ 2 In 1985, the Arizona Legislature established the Elected Officials' Retirement Plan to provide pension benefits for elected officials, including judges. A.R.S. §§ 38–801(15), 38–802, 38–804. The Plan is funded by employer and employee contributions, court fees, and investment proceeds. Id. § 38–810.

¶ 3 Upon retirement, Plan members receive monthly benefits based on 4% of their salary for each year worked, up to a maximum of 80% of their average yearly salary.¹Id. § 38–808(B)(1). Plan members are also eligible for additional financial benefits such as medical subsidies, id. § 38–817, disability benefits, id. § 38–806, survivor benefits, id. § 38–807, and benefit increases after retirement, id.§ 38–818.

¶ 4 The benefit increase formula in § 38–818 is similar to a cost-of-living adjustment. But unlike a cost-of-living adjustment, which is generally tied to the inflation rate, see Strunk v. Pub. Emps. Ret. Bd., 338 Or. 145, 108 P.3d 1058, 1070 (2005), the benefit increase in § 38–818 is not tied to inflation, but instead is tied to the Plan's return on investment. A benefit increase is determined by multiplying the amount by which the yearly total investment return exceeds 9% times the actuarial present value of pensions in payment status, subject to a statutory cap of 4%. A.R.S. § 38–818(B)–(C), (F). Any return in excess of the amount necessary to pay for the benefit increase in any given year is placed in a reserve fund to be used for future benefit increases, including years in which the return itself is not sufficient to provide an increase. Id. § 38–818(E).

¶ 5 When the Plan was created, no statutory mechanism for awarding post-retirement benefit increases existed; instead, the legislature passed ad hoc increases. See A.R.S. § 38, Ch. 5, Art. 3, Elected Officials' Retirement Plan (Historical and Statutory Notes). In 1990, the legislature enacted A.R.S. § 38–818, creating the first statutory mechanism for calculating increases. This statute provided that retired members are “entitled to receive a permanent increase in the base benefit” each year as determined by the statutory formula, but was effective only through 1994. Id. § 38–818(A) (1990). There was no benefit increase mechanism for 1995.

¶ 6 In 1996, the legislature removed the 1994 sunset provision, extending the permanent benefit increases indefinitely. Id. § 38–818 (1996). The legislature also reduced the annual benefit increase to the lesser of one-half of the percentage change in the consumer price index or 3%. Id. § 38–818(F). In 1998, the legislature amended § 38–818 to reinstate the 4% benefit increase cap. Id. § 38–818(F) (1998).

¶ 7 Later that year, Proposition 100 was referred to and passed by the voters, becoming Article 29 of the Arizona Constitution. It provides:

A. Public retirement systems shall be funded with contributions and investment earnings using actuarial methods and assumptions that are consistent with generally accepted actuarial standards.

B. The assets of public retirement systems, including investment earnings and contributions, are separate and independent trust funds and shall be invested, administered and distributed as determined by law solely in the interests of the members and beneficiaries of the public retirement systems.

C. Membership in a public retirement system is a contractual relationship that is subject to article II, § 25, and public retirement system benefits shall not be diminished or impaired.

Ariz. Const. art. 29, § 1.

¶ 8 Beginning in 2000, the ratio of the Plan's assets to its liabilities (“funding ratio”), began to steadily decline.² Staff of PSPRS, Comprehensive Annual Financial Report/Elected Officials' Retirement Plan FY 2010 at 7, available at http:// azmemory. azlibrary. gov/ cdm/ singleitem/ collection/ statepubs/ id/ 12803/ rec/ 1. Between 2000 and 2010, the Plan's funding ratio decreased from 141.7% to 66.7%. Id. Nevertheless, the reserve fund allowed retired members to receive a 4% benefit increase each year until 2011.

¶ 9 In 2011, the legislature enacted S.B. 1609, the provision at issue here. S.B. 1609 amended § 38–818 by prohibiting the transfer of any investment earnings that exceed the 9% rate of return to the reserve fund, and instead provided that such earnings would fund the basic retirement plan.³ 2011 Ariz. Sess. Laws ch. 357, § 62(A), (D). As a result, retired Plan members received only a 2.47% benefit increase in July 2011 (rather than the anticipated 4% increase) and did not receive any benefit increases in 2012 or 2013.

¶ 10 Effective July 1, 2013, S.B. 1609 also changed the formula used to calculate permanent benefit increases. A.R.S. § 38–818.01(B). This new formula increased the rate of return necessary to trigger a benefit increase from 9% to 10.5%. Id. § 38–818.01(D). The new formula also tied the availability of benefit increases to the Plan's overall funding ratio. Id. § 38–818.01(C). If the funding ratio is 60% or less, the Plan will not fund a benefit increase; if the funding ratio is between 60% and 65%, the Plan will fund a 2% benefit increase; and for each 5% increase in the funding ratio over 65%, the Plan will increase the amount of the benefit increase by 0.5% up to a maximum of 4%. Id. Beginning December 31, 2015, S.B. 1609 allows the legislature to provide ad hoc benefit increases in addition to the permanent benefit increases that may be awarded each year. Id. § 38–818.02.

¶ 11 In September 2011, retired judges Fields and Lankford, on behalf of themselves and as representatives of a class of retired Plan members and beneficiaries (collectively “Fields”), sued the Elected Officials' Retirement Plan and its board members (“EORP”), alleging that S.B. 1609 violates Article 29, § 1, as well as Article 2, § 25 of the Arizona Constitution, and Article 1, § 10 of the United States Constitution, both of which prohibit the enactment of laws impairing contract obligations. The State intervened to defend S.B. 1609. Fields moved to preliminarily enjoin implementation of S.B. 1609, and the trial court consolidated the hearing on the preliminary injunction with a trial on the merits. Following the trial, the court found that S.B. 1609 violates Article 29, § 1(C)'s command that “public retirement system benefits shall not be diminished or impaired.” The court reasoned that § 38–818's required benefit increase was a vested financial benefit that was directly and adversely affected by S.B. 1609. The court did not address Fields' contentions that S.B. 1609 violated the Contract Clauses of the state and federal constitutions. The court also awarded Fields attorneys' fees.

¶ 12 After EORP filed a timely notice of appeal, we granted EORP's petition to transfer the case to this Court under Arizona Rule of Civil Appellate Procedure 19(a). The funding of public pensions raises issues of statewide importance, and we have jurisdiction pursuant to Article 6, § 5(3) of the Arizona Constitution.

II.

¶ 13 Before we begin our analysis of the legal question presented, we note that the Justices of this Court are not members of the class of retired judges who are appellees in this case. We are, however, members of the Plan, as are most Arizona state judges, and we will be eligible for benefit increases pursuant to A.R.S. § 38–818 upon our retirement.⁴ No party has asked for our recusal, and, in any event, the rule of necessity applies.

¶ 14 The rule of necessity establishes that a judge is not...