Hall v. Elected Officials' Ret. Plan

• Decision Date: 10 November 2016
• Docket Number: No. CV–15–0180–T/AP,CV–15–0180–T/AP
• Citation: 751 Ariz. Adv. Rep. 18,383 P.3d 1107,241 Ariz. 33
• Parties: The Honorable Philip Hall et al., Plaintiffs/Appellees/Cross–Appellants, v. Elected Officials' Retirement Plan et al., Defendants/Appellants/Cross–Appellees, State of Arizona, Intervenor–Defendant/Appellant/Cross–Appellee.
• Court: Arizona Supreme Court

241 Ariz. 33

383 P.3d 1107

751 Ariz. Adv. Rep. 18

The Honorable Philip Hall et al., Plaintiffs/Appellees/Cross–Appellants,

v. Elected Officials' Retirement Plan et al., Defendants/Appellants/Cross–Appellees,State of Arizona, Intervenor–Defendant/Appellant/Cross–Appellee.

No. CV–15–0180–T/AP

Supreme Court of Arizona.

Filed November 10, 2016

Ron Kilgard (argued), Alison E. Chase, Keller Rohrback, L.L.P., Phoenix, Attorneys for Philip Hall and Jon W. Thompson et al.

Bennett Evan Cooper, Steptoe & Johnson, LLP, Phoenix, Attorney for Elected Officials' Retirement Plan and the Members of the Board of Trustees of the Public Safety Personnel Retirement System

Mark Brnovich, Arizona Attorney General, Charles A. Grube (argued), Senior Agency Counsel, Phoenix, Attorneys for State of Arizona

Colin F. Campbell, Osborn Maledon, PA, Phoenix; and Robert D. Klausner, Adam P. Levinson, Klausner Kaufman Jensen & Levinson, Plantation, FL, Attorneys for Amicus Curiae National Conference on Public Employee Retirement Systems

JUDGE HOWE^* authored the opinion of the Court, in which JUDGE BUTLER^*joined, JUDGE CATTANI^*joined and specially concurred, and JUSTICE BOLICK and JUDGE TREBESCH^*dissented in part and concurred in the judgment in part.

JUDGE HOWE, opinion of the Court:

¶ 1 In 2011, the Arizona Legislature enacted Senate Bill 1609, which made certain changes to the Elected Officials' Retirement Plan. The Bill changed the formula for calculating future benefit increases for retired Plan members and increased the amount that employed Plan members must contribute toward their pensions. Retired members of the Plan challenged the provision changing the formula for calculating future benefit increases. They argued that the change violated the Pension Clause of the Arizona Constitution, article 29, section 1

, which provides that “public system retirement benefits shall not be diminished or impaired.”¹ We agreed, holding that this provision was unconstitutional as applied to the Plan's retired members. See

Fields v. Elected Officials' Ret. Plan , 234 Ariz. 214, 320 P.3d 1160 (2014).

¶ 2 Employed members of the Plan also challenged the Bill. First, they argued that the unilateral changes to the benefit increases formula and to the amount they were required to contribute toward their pensions violated the Pension Clause for the reasons set forth in Fields

. Second, relying on our long-standing decision in Yeazell v. Copins , 98 Ariz. 109, 402 P.2d 541 (1965), they argued that because their pensions were part of their employment contracts that vested when they began employment, the Legislature could not unilaterally change the terms of their pensions to their detriment. The trial court granted the employed members summary judgment, invalidating the provisions at issue. The court denied the members' request for attorneys' fees and prejudgment interest, however. The court also denied the members' request to have the judgment run against the State, which had intervened in the case. EORP and the State appealed and the members cross-appealed.

¶ 3 Upon transfer from the court of appeals, we affirm the granting of summary judgment to the employed Plan members. As we held in Fields

, the Bill's change to the benefit increases formula violates the Pension Clause because it “diminishes and impairs” the employed members' pension benefits. The Bill's changes to the benefit increases formula and the contribution rate also violate our holding in Yeazell because the Legislature cannot unilaterally change the terms of the members' pension contracts once their rights to those terms have vested at the beginning of the members' employment. Contrary to the trial court's ruling, however, we find that the employed members are entitled to attorneys' fees and prejudgment interest and that the judgment must run against the State as well as the Plan.

I. FACTS AND PROCEDURAL HISTORY

¶ 4 In 1985, the Legislature established the Plan to provide pension benefits for elected officials, including judges. A.R.S. §§ 38–801(15)

, –802, –804. The Plan has four funding sources: employer contributions, employee contributions, court filing fees, and investment proceeds. A.R.S. § 38–810. The employee contribution rate was set by statute initially at 6%, with the employer being responsible for contributing the remaining amount necessary to fund a defined benefit upon retirement. See A.R.S. § 38–810(A) (1985). In 1987, A.R.S. § 38–810(A) was amended to increase the employees' contribution to 7%. See 1987 Ariz. Legis. Serv., ch. 146, § 4, codified at A.R.S. § 38–810(A)

(1987).

¶ 5 During the 1990s, the Plan generated investment returns that far exceeded the actuarially assumed rate of return. See PSPRS Plan's Funding Status Report with Options for Improving Funding and Reducing Required Contributions , at 2 (2010). During the same period, however, the Plan's financial health was being “seriously compromised” because the Plan was gradually concentrating its investments in securities of high technology and telecommunications companies. Id. In March 2000, the prices of technology and telecommunications securities began to “decline rapidly.” Id. This made the Plan vulnerable to major financial shocks in 2000, 2008, and 2009. By fiscal year 2011, the Plan's funding ratio—the actuarial value of the Plan's assets divided by its actuarial accrued liabilities—was 62.1%, a drop from 121% in 1998 and 101.9% in 1985. Accordingly, the State's contribution level necessarily increased, while the employee contribution rate remained constant, as set by statute.

¶ 6 In 2011, attempting to address continued rising costs, the Legislature enacted the Bill, making several unilateral changes to the Plan to be applied retroactively from June 30, 2011. See 2011 Ariz. Legis. Serv., ch. 357. One change the Bill made was to the statutory formula for calculating permanent benefit increases under A.R.S. § 38–818

. The Bill amended A.R.S. § 38–818.01 to prohibit the transfer of any investment earnings that exceed the rate of return to the reserve fund and changed the formula used to calculate the permanent benefit increases, increasing the rate of return necessary to trigger a benefit increase. See A.R.S. § 38–818.01(B).

¶ 7 We resolved whether the Bill's change to the statutory formula for calculating permanent benefit increases was constitutional with respect to retired members in Fields , 234 Ariz. at 221 ¶ 34, 320 P.3d at 1167

. We held that the formula was a “benefit” for purposes of the Pension Clause and that the Bill's change to the formula violated the clause because it diminished and impaired the retired members' retirement benefits. Id. at 220–21 ¶¶ 29, 34, 320 P.3d at 1166–67. Because the Bill retroactively prevented the transfer of funds to the Plan's reserve, the Plan could not fund expected benefit increases, and retired members' benefit increases consequently were reduced or eliminated in 2011, 2012, and 2013. Id. at 221 ¶ 35, 320 P.3d at 1167. The Bill also made it less likely that retired members would receive future benefits increases because of the raised rate of return required to fund an increase. Id. at ¶ 36, 320 P.3d at 1167.

¶ 8 The Bill made another change that was not at issue in Fields

, but is here. The Bill amended the employee contribution rate structure by increasing the rate to 10% for fiscal year 2011–2012 and to 11.5% for fiscal year 2012–2013. A.R.S. § 38–810(F)(1)–(3) (2011). It also set the rate for fiscal year 2013–2014 and each fiscal year thereafter to the lesser of 13% of the member's gross salary or 33.3% of the sum of the member's contribution rate from the preceding fiscal year and the normal cost plus the actuarially-determined amount required to amortize the employer's unfunded accrued liability. A.R.S. § 38–810(F)(4) (2011).

¶ 9 In November 2011, Judges Philip Hall—who has since retired—and Jon W. Thompson, on behalf of themselves and as representatives of a class of employed Plan members and beneficiaries as of July 20, 2011, the Bill's effective date (collectively, “Class Members”), sued the Plan and the Board of Trustees of the Public Safety Personnel Retirement System (collectively, “EORP”). The Class Members alleged that the Bill violated Yeazell

, the Pension and Judicial Salary Clauses of the Arizona Constitution, and the Contract Clauses of the Arizona and United States Constitutions. The State intervened to defend the Bill. After the State intervened, the Class Members notified the trial court and the parties that they would seek relief, including attorneys' fees, expenses, and taxable costs, not only from EORP but also from the State.

¶ 10 After intervening litigation, the parties each moved for summary judgment. The Class Members maintained—as relevant here—that the Bill violated Yeazell

by unilaterally modifying their interests in their pensions, which had vested at the outset of their employment with the State, and violated the Pension Clause by diminishing their entitled benefits. EORP and the State responded that the Class Members' rights had not yet vested and therefore the Legislature could modify the pension plan as it saw fit. EORP and the State noted that in 2000, the Legislature had enacted A.R.S. § 38–810.02

(“the vesting statute”), providing that EORP benefits vest at the time the employee applies for benefits or retires. EORP and the State argued that because the statute applies retroactively, it has become part of the Class Members' employment contracts with the State, and accordingly, their rights do not vest until they retire.

¶ 11 The trial court granted the Class Members' motion for summary judgment and denied EORP's and the State's cross-motions for summary judgment. The court held that the Pension Clause protected the benefit increases formula and the 7% prior contribution rate because they constituted “benefits” that were always part of the members' contractual relationship with the State. The court rejected EORP's argument that the vesting statute...