National Educ. Association-Rhode Island ex rel. Scigulinsky v. Retirement Bd. of Rhode Island Employees' Retirement System

• Decision Date: 01 February 1999
• Docket Number: ASSOCIATION-RHODE,Nos. 98-1763,98-1782,s. 98-1763
• Citation: 172 F.3d 22
• Parties: 160 L.R.R.M. (BNA) 3012, 161 L.R.R.M. (BNA) 2256, 133 Ed. Law Rep. 738 NATIONAL EDUCATIONISLAND, By Its Secretary, Tia SCIGULINSKY, Et Al., Plaintiffs, Appellees/Cross-Appellants, v. RETIREMENT BOARD OF THE RHODE ISLAND EMPLOYEES' RETIREMENT SYSTEM, Et Al., Defendants, Appellants/Cross-Appellees. Richard R. DeOrsey, Plaintiff, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 22

172 F.3d 22

160 L.R.R.M. (BNA) 3012, 161 L.R.R.M. (BNA) 2256,

133 Ed. Law Rep. 738

NATIONAL EDUCATION ASSOCIATION-RHODE ISLAND, By Its Secretary, Tia SCIGULINSKY, Et Al., Plaintiffs, Appellees/Cross-Appellants, v. RETIREMENT BOARD OF THE RHODE ISLAND EMPLOYEES' RETIREMENT

SYSTEM, Et Al., Defendants, Appellants/Cross-Appellees.

Richard R. DeOrsey, Plaintiff, Appellant.

Nos. 98-1763, 98-1782.

United States Court of Appeals, First Circuit.

Heard Feb. 1, 1999.

Decided March 24, 1999.

Joan McPhee and Neil F.X. Kelly, Special Assistant Attorney General, with whom John C. Bartenstein, Richard S. Weitzel, Ropes & Gray, Thomas A. Palombo, Special Assistant Attorney General, and Jeffrey B. Pine, Attorney General, were on brief for defendants Nancy Mayer and Retirement Board of the Employees' Retirement System of the State of Rhode Island and Joann Flaminio in her capacity as Executive Director.

Robert H. Chanin with whom John M. West, Jonathan D. Hacker, Bredhoff & Kaiser, P.L.L.C., Thomas J. Ligouri, Jr., Richard A. Skolnick and Skolnick, McIntyre & Tate were on brief for plaintiffs National Education Association-Rhode Island, et al.

Marc B. Gursky with whom Gursky Law Associates was on brief for plaintiff Richard R. Deorsey.

Before BOUDIN, Circuit Judge, ALDRICH, Senior Circuit Judge, and SHADUR, ^* Senior District Judge.

BOUDIN, Circuit Judge.

In 1936, Rhode Island created a retirement system for state employees, school teachers, and other employees of cities and towns that chose to participate. R.I. Gen. Laws §§ 36-8-1 to 36-10-39. The retirement system is administered by the Retirement Board ("the Board"), which is chaired by the state treasurer. R.I. Gen. Laws §§ 36-8-4, 36-8-9. The retirement system is a "defined benefit plan" in which benefits are determined not by the amount contributed during service but by a schedule of benefits that specifies the amount to be paid.

At present, benefits under the Rhode Island statute are set as a percentage of the average of the employee's salary earned during the three highest consecutive years of earnings, multiplied by the number of years of credited service. R.I. Gen. Laws § 36-10-10. An employee may retire and begin receiving payments at any age after 28 years of service or after reaching age 60 and completing 10 years of service. Id. § 36-10-9. Employees contribute a fixed percentage of annual earnings to the retirement system, but the state pays the balance needed to provide the scheduled benefit. Id. § 36-10-2.

In the 1980s, teachers' unions in Rhode Island sought legislation to allow employees of unions representing state employees including teachers to participate in the state retirement system; these union employees are not, at least in that capacity, public employees. Thus, the statute needed to be amended to permit them to receive benefits. In early 1987, a bill embodying such a proposal was introduced and placed on the legislature's consent calendar; and it was passed on the final day of the session without debate and apparently without much public notice.

The new provision, codified at R.I. Gen. Laws § 36-9-33, not only allowed union employees to join the retirement system, but also permitted them to purchase credit, on payment of a modest amount to the system, for all years previously served with the union. ¹ This allowed the union employee to treat all prior years of employment by the union as years of public service needed to qualify for state pension benefits and to treat earnings from the union as if they were public compensation for purposes of computing the "highest three (3) consecutive years" average. Id. § 36-10-10.

Furthermore, the provision allowed union employees to receive pension benefits based on salaries over which the state had no control. Because the retirement system calculates benefits based on the average of the three highest consecutive years' salary (multiplied by a factor based on years of service), the union could raise salaries for pension-qualifying union employees and thereby boost their pension benefits from the state retirement system. The record reflects significant increases in union employee salaries following the passage of section 36-9-33. ²

The effect, as more fully described below, was to allow a number of highly paid union officials to qualify for state pensions almost immediately in amounts greatly in excess of their contributions to the system. The pensions were in addition to, not in place of, whatever pensions were provided by the union. The district court later calculated the plaintiffs' total contribution to the Retirement System at $1,995,784, the present value of their projected pension benefits at about $11,430,579, and an average projected rate of return for the individual plaintiffs of approximately 1250 percent.

When the situation became widely known, the legislature repealed section 36-9-33 in toto on June 9, 1988. See 1988 R.I. Pub. Laws ch. 486 ("the Repeal Act"). At that time, applications by union employees were pending before the Board, which had declined to process them. Despite the repeal, two teachers' unions filed suit in October 1988 and later succeeded in persuading a state court judge that the repeal was prospective only and did not permit the Board to exclude union employees who had sought to become members and purchase credits prior to the repeal. See RIFT v. Retirement Sys., No. PC 88-4974 (R.I. Sup.Ct. Dec. 21, 1989).

As a result, qualified union employees then entered the retirement system, some retiring fairly soon after. Bernard Singleton, for example, became a member of the Retirement System effective January 1, 1990 (as did other individual plaintiffs) and promptly purchased roughly 25 years of service credit for his prior union employment at a cost of $25,411.09. On July 28, 1990, several months later, at age 52, he took "early retirement" and immediately began to collect a pension of approximately $53,000 per year, with an expected lifetime benefit of about $750,000. ³

In July 1994, the legislature responded by "evicting" the union employees. See 1994 R.I. Pub. Laws ch. 413, § 1, codified at R.I. Gen. Laws § 36-9.1-l et seq. ("the Eviction Act"). The new statute, which sparked the present litigation, terminated pensions for union employees who had entered under the now repealed statute. It provided for return of their contributions, with interest, reduced by any benefits they had received. Id. The Eviction Act stated that inclusion of union employees had "no rational relationship to any legitimate governmental purpose" and would invade the corpus in violation of the requirements of the Internal Revenue Code. Id. § 36-9.1-1.

Two teachers' unions and 22 present or former union employees then brought the present suit in the district court in July 1994 against the Board, its chairperson, and its executive director. The plaintiffs alleged that the Eviction Act violated the Contract, Takings and Due Process Clauses of the Constitution, see U.S. Const. art. I, § 10, cl. 1; id. amend. V; id. amend. XIV, and that under 42 U.S.C. § 1983, they were entitled to declaratory relief, an injunction, restoration of any benefits wrongly withheld, and attorney's fees.

The district court denied the defendants' motion to dismiss. See National Educ. Ass'n-R.I. v. Retirement Bd., 890 F.Supp. 1143, 1165 (D.R.I.1995) ("NEA I "). Following discovery and cross motions for summary judgment, the district court decided the heart of the case in a detailed and lucid opinion on August 7, 1997. See National Educ. Ass'n-R.I. v. Retirement Bd. of R.I. Employees' Retirement Sys., 972 F.Supp. 100 (D.R.I.1997) ("NEA II "). The decision resolved all legal issues but reserved for later disposition a few factual questions as to the status of three individual plaintiffs.

In a nutshell, the district court ruled that the Takings Clause protected the benefits of two groups of plaintiffs: those who were eligible to retire and had retired by the date of the Eviction Act (July 15, 1994), and those who were eligible to retire but were still working as of that date. ⁴ Three other plaintiffs who were still working and were not eligible for retirement at the date of the Eviction Act were held not protected by the Takings Clause or by the Contract Clause or by substantive due process concepts. See id. at 114-15.

Given these legal rulings, the parties then stipulated as to the status of two of the other remaining plaintiffs--one was eligible to retire and therefore protected and the other was not--leaving only one plaintiff (DeOrsey) whose status was contested. In April 1998, the district court conducted a bench trial and ruled that DeOrsey had never been eligible to join the retirement system. Thereafter, the district court entered a final judgment in favor of the eligible plaintiffs and against the ineligible ones. The defendants now appeal from the first part of the judgment, and the ineligible plaintiffs, together with DeOrsey, from the second.

On appeal, our review is de novo as to the legal issues resolved on summary judgment, see Terry v. Bayer Corp., 145 F.3d 28, 34 (1st Cir.1998), and for clear error as to the factual issues resolved at DeOrsey's bench trial. See Williams v. Poulos, 11 F.3d 271, 278 (1st Cir.1993). We begin with the plaintiffs' Contract Clause claims, if only because most of the precedent addresses such cases under this rubric. The claims raise a difficult set of issues that were expressly reserved in this court's leading decision in McGrath v. Rhode Island Retirement Board, 88 F.3d 12 (1st Cir.1996), further complicated by the somewhat eccentric facts of this case.

Pension plans come in all sorts of shapes and sizes but the typical plan contemplates a stream of payments to be received by the employee starting upon retirement; both the terms and the payment formula are normally stated in the plan. In defined benefit plans, such as that of Rhode Island, the employee may be...