Koster v. City of Davenport

Decision Date15 January 1999
Docket NumberNo. 98-1459,98-1459
Citation183 F.3d 762
Parties(8th Cir. 1999) KIRK KOSTER; MARTIN LOPEZ; WARREN BEINE; MIKE COLLINS; JEFF GOODSMAN; NATE HOPKINS; JAMES CONNELL, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, APPELLANTS, v. CITY OF DAVENPORT, IOWA; CITY OF BETTENDORF, IOWA; CITY OF MUSCATINE, IOWA; CITY OF CLINTON, IOWA; CITY OF IOWA CITY, IOWA, APPELLEES. Submitted:
CourtU.S. Court of Appeals — Eighth Circuit

Appeal from the United States District Court for the Southern District of Iowa. [Copyrighted Material Omitted] Before Loken, Hansen, and Morris Sheppard Arnold, Circuit Judges.

Hansen, Circuit Judge.

Appellants, vested members of the Iowa statewide fire and police retirement system (statewide plan), sought injunctive and declaratory relief as well as money damages against the appellee cities, which are participating employers in the statewide plan. The appellant members claim that the cities violated their federal and state constitutional rights by using statewide plan assets to offset the cities' future contributions to the statewide plan. The district court1 granted summary judgment in favor of the cities on the members' constitutional claims and on their pendent state law claims. The members appeal, and we affirm.

I.

Prior to 1992, Iowa cities maintained their own local pension plans for police and fire employees. Each of the separate municipal plans in question was a defined benefit plan. The employees contributed a set percentage of their compensation, while the city's contribution varied to meet the funding requirements of the plan. A "defined benefit plan" predetermines the amount of a participating member's retirement benefits, generally based on a percentage of the member's compensation. See, e.g., Iowa Code § 411.6(2)(c) (1997) (paying up to sixty percent of the member's average final compensation). The employer bears the risk of market fluctuation in a defined benefit plan. The employer must fund the plan to meet the actuarially-determined pension liability of covered members regardless of the market performance of the fund. If the fund performs poorly, the employer must make up the deficiency by contributing more to the fund; if the market performs well, the employer reaps the benefit in lower contributions. The employee is entitled to the predetermined benefit regardless of the amount of contributions made to fund the plan. In contrast, "a defined contribution" plan entitles the member to the amount in his individual account at the time of his retirement, which equals the contributions made to the account plus or minus the investment's market fluctuations. See generally, 2 MARK A. ROTHSTEIN ET AL., EMPLOYMENT L AW § 11.2, at 431-33 (1994).

Effective January 1, 1992, the Iowa legislature revised Iowa Code chapter 411 and created a centralized statewide pension plan to replace the local municipal plans. See Iowa Code § 411.2. All of the local police and firefighter municipal plans merged into the statewide plan. The new statewide plan is also a defined benefit plan. See Iowa Code § 411.6. At the time of the conversion to the statewide plan, the plan's actuary determined that each of the appellee cities' plans was over-funded. Chapter 411 allowed each city to use the excess funds to offset either the employees' and city's future contributions to the statewide plan or only the city's future contributions to the plan. See id. § 411.38(4). Each appellee city chose to use its excess to fund only the city's future contributions. If the actuary had determined that any separate municipal plan was under-funded at the time it was transferred to the statewide plan, the statute required that city to pay additional amounts to properly fund its share of the statewide plan. See id. § 411.38(1)(b).

The plaintiff members brought their claim against the cities under 42 U.S.C. § 1983, alleging that the cities' decisions under section 411.38(4) to use the excess funds to reduce only the cities' future contributions (as opposed to reducing both the cities' and the members' future contributions) violated their federal and state constitutional rights. They argue that the cities (1) impaired their constitutional right to contract; and (2) unconstitutionally deprived them of their property interest in the funds without due process of law. 2 The cities' use of the excess funds allegedly reduced the value of the members' benefits under the plan, compromised the soundness of the plan, and violated the plan requirement that the funds be used for the exclusive benefit of the members. The members also brought state law claims of breach of statutory and common law trust duties, seeking equitable remedies in the form of a constructive trust. The district court granted the cities' motion for summary judgment, finding that the statute was constitutional and did not violate state trust laws. The members appeal.

II.

We review de novo the district court's grant of summary judgment and apply the same standards applied by the district court. See Dulany v. Carnahan, 132 F.3d 1234, 1237 (8th Cir. 1997). Because the facts in this case are undisputed, we limit our inquiry to whether the cities are entitled to judgment as a matter of law. See American Family Mut. Ins. Co. v. Van Gerpen, 151 F.3d 886, 887 (8th Cir. 1998).

A. Contract Clause 3

The United States Constitution provides that "[n]o State shall... pass any... Law impairing the Obligation of Contracts...." U.S. C ONST. art. I, § 10, cl. 1. When reviewing the members' contention that section 411.38(4) (permitting the cities to choose how to allocate excess funds) impermissibly impairs their constitutional right to contract, we must focus on "whether the change in state law has'operated as a substantial impairment of a contractual relationship.'" General Motors Corp. v. Romein, 503 U.S. 181, 186 (1992) (quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 (1978)). The modern Contract Clause analysis involves three components: "(1) Does a contractual relationship exist, (2) does the change in the law impair that contractual relationship, and if so, (3) is the impairment substantial?" Honeywell, Inc. v. Minnesota Life and Health Ins. Guar. Assoc., 110 F.3d 547, 551 (8th Cir.) (en banc) (citing Romein, 503 U.S. at 186), cert. denied, 118 S. Ct. 156 (1997). If a substantial impairment of a contractual relationship exists, the legislation nonetheless survives a constitutional attack if the "impairment is... justified as'reasonable and necessary to serve an important public purpose.'" Parella v. Retirement Bd. of the R.I. Employees' Retirement Sys., 173 F.3d 46, 59 (1st Cir. 1999) (quoting United States Trust Co. v. New Jersey, 431 U.S. 1, 25 (1977)). See also, Honeywell, 110 F.3d at 551.

A statutory enactment is generally presumed not to create "contractual or vested rights but merely declares a policy to be pursued until the legislature shall ordain otherwise." National R. R. Passenger Corp. v. Atchison, Topeka & Sante Fe Ry, 470 U.S. 451, 456-66 (1985) (quotations omitted). See also Honeywell, 110 F.3d at 552. The language and circumstances of the statute must evince a clear intent by the legislature to create contractual rights so as to bind the state. See Honeywell, 110 F.3d at 557 (Loken, J., Concurring) (finding the use of the word "guarantee" in the statute at issue to evince such an intent); see also Parella, 173 F.3d at 60 ("[S]tate statutory enactments do not of their own force create a contract with those whom the statute benefits.") (internal quotations omitted).

Chapter 411's stated purpose "is to promote economy and efficiency in the municipal public safety service by providing an orderly means for police officers and fire fighters to have a retirement system which will provide for the payment of pensions." Iowa Code § 411.1A. Nowhere in the statute is the word "contract" mentioned. Once a participating member becomes vested in the retirement system, his benefits cannot be taken away. See id. § 411.6(1)(b) (" Any member who has been a member of the retirement system four or more years... shall upon attaining retirement age, receive a service retirement award....") (emphasis added). See also Lage v. City of Marshalltown, 235 N.W. 761, 763 (Iowa 1931) (" It is settled in this... jurisdiction[],... that upon the happening of the event which entitles a police officer or fireman to a pension, his right thereto then becomes immediately vested and may not be taken away."). Despite the plan's vesting mechanism, the Supreme Court of Iowa has determined that the police officers' and fire fighters' rights under the retirement system are statutory rather than contractual. See Lage, 235 N.W. at 763 ("[T]he duty to provide a fund with which to pay the pensions due is purely statutory and not contractual."); see also Grandia v. City of Oskaloosa, 405 N.W. 2d 849, 852 (Iowa 1987) (characterizing Lage as "holding that a statute providing for a pension may be modified or even repealed by the legislature"). Other circuit courts have found that statutorily-created state pension plans are not contractual in nature for purposes of the federal Contract Clause because the statutes lacked a clear indication that the legislature intended to create contractual rights. See, e.g., National Educ. Ass'n-R. I. v. Retirement Bd. of the Retirement Sys., 172 F.3d 22, 26, 28 (1st Cir. 1999) (differentiating between vested rights and contractual rights and finding no contractual right in the Rhode Island state pension plan because the statute did not use the term "contract" and did not have an anti-retroactivity clause regarding future benefit changes); Parker v. Wakelin, 123 F.3d 1, 7-9 (1st Cir. 1997) (finding no contractual right in Maine's public pension plan and noting the need for a close scrutiny of individual state plans due to the vast differences in public pension plans from state to state), cert. denied, 118 S. Ct. 1675, 140 L.Ed.2d 813 (...

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