Md. State Teachers Ass'n v. Hughes

• Decision Date: 25 September 1984
• Docket Number: Civ. A. No. M-84-1435.
• Citation: 594 F. Supp. 1353
• Parties: MARYLAND STATE TEACHERS ASSOCIATION, INC., et al. v. Harry HUGHES, Governor of the State of Maryland, et al.
• Court: U.S. District Court — District of Maryland

594 F. Supp. 1353

MARYLAND STATE TEACHERS ASSOCIATION, INC., et al. v. Harry HUGHES, Governor of the State of Maryland, et al.

Civ. A. No. M-84-1435.

United States District Court, D. Maryland.

September 25, 1984.

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Frank Cummings, Alicia M. Kershaw and Cummings & Kershaw, P.C., Washington, D.C., and Walter S. Levin, Baltimore, Md., for plaintiffs Md. State Teachers Ass'n, Inc., Md. State Educ. Services Council, Inc., Kenneth R. Bourn, Jr., Joseph T. Dunn, Jr., Thomas N. Ellis, Jane Elizabeth Hearn, Kathleen R. McGehrin, Karl Kirby Pence, Jr., and Gail Sears Riley.

J. Edward Davis and Monica L. Newman, Baltimore, Md., for plaintiffs Md. Classified Employees Ass'n, Walter S. Finster, Michael W. Marshall and Nika Jean Potts.

William H. Engelman and Kaplan, Heyman, Greenberg, Engelman & Belgrad, P.A., Baltimore, Md., for plaintiffs Md. Public Employees Council 67, American Federation of State, County and Mun. Employees (AFL-CIO), Md. Public Employees Council 92, American Federation of State, County and Mun. Employees (AFL-CIO), American Federation of State, County and Mun. Employees, Local 2250 (AFL-CIO), Baltimore Teachers Union, Local 340 (American Federation of Teachers, AFL-CIO), and Henry Simon, III, Alma C. Brown, Hugh M. Johns, William S. Hudson, Jr., Harry N. Updegraff, Edith L. Simms, Ellouise Strock, John R. Johnson and William J. Flanigan.

Larry P. Weinberg and Kirschner, Weinberg, Dempsey, Walters & Willig, Washington, D.C., of counsel, for plaintiff American Federation of State, County and Mun. Employees, AFL-CIO.

Robert J. McIntosh, Washington, D.C., for plaintiff Assembly of Government Employees, affiliate of Md. Classified Employees Ass'n, Inc.

Stephen H. Sachs, Atty. Gen. of Md., Diana G. Motz, Robert A. Zarnoch, Linda H. Lamone, Carol S. Sugar, Susan K. Gauvey, and Jack Schwartz, Roberta M. Ward, Asst. Attys. Gen., Kathryn M. Rowe, Staff Atty., Baltimore, Md., for defendants.

John A. Austin, Towson, Md., for The Md. Ass'n of Counties, Inc., as amicus curiae.

George A. Nilson, Baltimore, Md., for Greater Baltimore Committee, Inc., as amicus curiae.

OPINION

JAMES R. MILLER, Jr., District Judge.

On September 17, 1984, this court granted summary judgment to the defendants as to the claims made in this suit on behalf of the plaintiff class that the 1984 "Pension Reform Law" violates the Contract Clause of the United States Constitution and the Due Process Clause of the Fourteenth Amendment. The plaintiff class consists of those public school teachers and state employees who were, on December 31, 1979 and remain, members of the Employees' Retirement System or the Teachers' Retirement System. This opinion is intended to set out briefly the rationale of the court's action.

I. Factual Background

Until December 31, 1979, all Maryland teachers and state employees were required to become and remain members of, and contribute to, the Teachers' Retirement System or the Employees' Retirement System. Under those retirement systems, teachers and employees received defined retirement benefits and a full post-retirement cost of living adjustment (COLA), and, in return, they were required to make annual mandatory contributions of 5% of their respective salaries to the Retirement Systems.

In 1979, the Maryland General Assembly passed Senate Bill 394 and House Bill 634, codified at Md.Code Ann., Art. 73B (1983), which established a two-tiered retirement/pension system for state employees and teachers in Maryland. Under the terms of the statute, a state employee or a teacher could choose to remain respectively in the Employees' Retirement System, see Md.Code Ann., Art. 73B, § 3(9), or the Teachers' Retirement System, see Md.Code Ann., Art. 73B, § 83(9), or could elect to transfer respectively to the Employees' Pension System or the Teachers' Pension System, see Md.Code Ann., Art. 73B, §§ 31-32.

If transfer to the pension system were chosen, the cost of living adjustment on retirement benefits would be capped at 3%, see Md.Code Ann., Art. 73B, § 120 and § 146, but no salary contributions would be required except as to salary in excess of the Social Security Wage Base. In addition, a transferring teacher or employee would receive a refund of a "part of his accumulated contributions to the Retirement System as of the date of transfer." Md.Code Ann., Art. 73B, § 14(1)(g) and § 89(1)(e).

The statute provided that those employees or teachers who chose to remain in their respective retirement systems established under Article 73B and who did not elect at any time to transfer to their respective pension systems,

"shall, as a condition of that person's employment contract, be entitled to remain a member of the retirement system without change in the benefits provided in the retirement system as of December 31, 1979. Any person receiving benefits under the provisions of this subtitle on December 31, 1979 shall continue to receive the benefits as provided in the retirement system as of December 31, 1979. These benefits shall include but not be limited to:

(a) The eligibility for service retirement upon completion of 30 years service or attainment of age 60;

(b) The eligibility for a reduced service retirement upon completion of a certain length of service;

(c) The service retirement allowance of one fifty-fifth of average final compensation;

(d) The retirement allowances provided for ordinary or accidental disability;

(e) The selection of options for service or disability allowances;

(f) The adjustment of the retirement allowance for increases in the Consumer Price Index;

(g) The death benefit;

(h) The level of contributions from members; and

(i) The length of service for members to vest benefits in the system."

(Emphasis supplied), Md.Code Ann., Art. 73B, § 3(9) and § 83(9).

Thus, those teachers and employees who chose to remain in the retirement systems would continue to contribute 5% of their salaries to the systems and would receive, at retirement, full cost of living adjustments.

In 1984, the Maryland legislature passed House Bill 991, the so-called "Pension Reform Law," which amended Article 73B, effective June 1, 1984. See Paper 35, Ex.A. Under the 1984 Act, four retirement benefit options, often referred to as the "menu plan," were substituted as the choices available as of July 1, 1984 to members of the plaintiff class.

The first, the transfer option, allows for the transfer as of July 1, 1984, of all service credits from the retirement system to the pension system combined with a return to the employee of part of the employee's contribution to the retirement system. See H.B. 991, § 11B(5)(B) and § 86B(6)(B).

The bifurcated option allows an employee or teacher to keep his service credits accumulated before July 1, 1984 in the retirement system at benefit levels available as of December 31, 1979, subject to full cost of living adjustments. For service credited after July 1, 1984, benefits would accrue under the pension system formula subject to a 3% cost of living cap. No employee contributions would be required after July 1, 1984 unless the employee/teacher earned in excess of the Social Security maximum. See H.B. 911, §§ 3(9)(C), 11B, and §§ 83(9)(B), 86B.

Under the 5%/5% option, past and future service credits would remain in the retirement system but cost of living adjustments would be limited to 5% as to all service, past and future, and employee contributions would continue at 5% of total salary. See H.B. 991, § 11C and § 86C.

Finally, if an employee/teacher chose the 7% option, past and future service credits would remain in the retirement system with full cost of living adjustments, but effective July 1, 1984, employee contributions to the system would increase from 5% of salary to 7% of salary. See H.B. 991, § 11D and § 86D.

The nub of the plaintiffs' suit is their allegation that the 1979 Act, created a contract between the State and the employees and teachers governed by the Act and that the 1984 amendments unjustifiably impaired the contract in a substantial way in violation of Article I, Section 10 of the Federal Constitution, the Contract Clause.

Jurisdiction exists in this court under 28 U.S.C. § 1331.

II. Contract Clause

A. Legal Framework Applicable

In an apparent shift of emphasis,¹ the Supreme Court recently has revitalized Contract Clause² jurisprudence in striking down state legislative action in two cases, United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977), and Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978).

The first case arose out of earlier legislation by the New York and New Jersey legislatures empowering the Port Authority to take over a financially troubled passenger railroad running between New York City and Newark. To relieve investor concern over this added financial burden, the legislatures passed a statutory covenant to the effect that, so long as certain contemplated bonds of the Authority were outstanding and the consent of the bond holders had not been obtained, the Port Authority could not use any revenues or reserves "which have been or shall be pledged in whole or in part as security for such bonds, for any railroad purposes whatsoever other than permitted purposes hereinafter set forth." 1962 N.J.Laws, c. 8, § 6; 1962 N.Y.Laws, c. 209, § 6, quoted in United States Trust, 431 U.S. at 10, 97 S.Ct. at 1511. Pursuant to this legislation, the Port Authority took over the operation of the railroad in 1962, raising the capital with which to make the acquisition through the sale of bonds to private investors.

By 1973, the actual deficits incurred by the Port Authority from operating its transit system had exceeded the permitted deficits under the statutory covenant, thereby preventing the Port Authority from issuing any new bonds for any new money-losing passenger railroad facilities. Meanwhile, public pressure for...