Taylor v. City of Gadsden, an Ala. Mun. Corp.

• Decision Date: 16 September 2014
• Docket Number: No. 13–13885.,13–13885.
• Citation: 767 F.3d 1124
• Court: U.S. Court of Appeals — Eleventh Circuit
• Parties: Joe TAYLOR, Jeff Mayben, Lecil Harrelson, Jeff Morris, John Alan Calvert, David Putman, Derreck Sherrill, on behalf of themselves and all others similarly situated, Plaintiffs–Appellants, v. CITY OF GADSDEN, an Alabama Municipal corporation, Sherman Guyton, in his official capacity as Mayor of the City of Gadsden, Defendants–Appellees.

767 F.3d 1124

Joe TAYLOR, Jeff Mayben, Lecil Harrelson, Jeff Morris, John Alan Calvert, David Putman, Derreck Sherrill, on behalf of themselves and all others similarly situated, Plaintiffs–Appellants,

v.CITY OF GADSDEN, an Alabama Municipal corporation, Sherman Guyton, in his official capacity as Mayor of the City of Gadsden, Defendants–Appellees.

No. 13–13885.

United States Court of Appeals, Eleventh Circuit.

Sept. 16, 2014.

Raymond Fitzpatrick, Law Office of Raymond P. Fitzpatrick, Jr., Birmingham, AL, for Plaintiff–Appellant.

Howard Edgar Howard, Ford Howard & Cornett, PC, Gadsden, AL, for Defendants–Appellees.

Appeal from the United States District Court for the Northern District of Alabama. D.C. Docket No. 4:11–cv–03336–VEH.

Before TJOFLAT, Circuit Judge, MOORE,^*Chief District Judge, and SCHLESINGER,^* District Judge.

TJOFLAT, Circuit Judge:

This case presents a problem common to most cities in the United States. Their pension funds have been operating at a substantial loss, and the cities' long-term liabilities are becoming unfunded at an exponentially increasing rate. That is, the contributions employees and cities are making to pension funds—as a percentage of the employees' salaries—are being used to pay the pensions earned by retirees instead of being set aside and invested for employees' retirements.

The trend is all too familiar to Gadsden, Alabama. In 2011, its pension program—administered by the State of Alabama but comprised of local funds—had an unfunded liability of $50.9 million. In fact, Gadsden anticipated having to pay 24.54% of its employees' total compensation out of public funds during the following year to prevent default. This projected expense contributed to a $1.5 million shortage in Gadsden's proposed budget.

With its back against the wall—and in an effort to resuscitate its flailing pension program—Gadsden raised its employees' pension contributions by 2.5% of their total compensation. It did so pursuant to an Act passed by the Alabama legislature mandating such an increase for state employees and permitting, but not requiring, localities to do the same. In response, a class of Gadsden firefighters ¹—whose contribution rate was raised from 6% to 8.5%— brought this lawsuit. They alleged that the City's actions impaired the terms of their employment contracts, in violation of both the United States Constitution ²and the Alabama Constitution.³ After extensive record development, and on cross-motions for summary judgment, the District Court dismissed the complaint for failing to demonstrate that any contractual right had been impaired. We affirm.

I.

Since 1939, Gadsden has provided its firefighters with a pension program as part of their compensation. Firefighters initially belonged to a local program, the Policemen's and Firemen's Retirement Fund of the City of Gadsden (the “PFRF”). In 2002, concerns about the PFRF's solvency led Gadsden to negotiate a new arrangement with these employees: the City, it was agreed, would terminate the local fund and move all of its assets, liabilities, and members into the Employee Retirement System of Alabama (the “ERS”)—a state-administered retirement fund. All Gadsden employees, except for firefighters and police officers, had been members of the ERS since 1970.

Because the current plan's unfunded liability stems from the PFRF, we first describe the PFRF and the consequences of its merger with the ERS in 2002. We then turn to the events surrounding Gadsden's decision to increase plaintiffs' pension contribution rate.

A.

Alabama Legislative Act 106 of 1939 established the PFRF in Gadsden.⁴ Part of the PFRF's funding came from employee contributions. At the time of the PFRF's creation, police officers and firefighters were required to contribute 2% of each paycheck to the fund.⁵ Over the years, this contribution rate increased three times: to 4% in 1959,⁶ to 10% in 1975,⁷ and to 11% in 1983.⁸ In exchange for these contributions, an employee who completed thirty years of consecutive service was entitled to “receive benefits equal to 50% of the final salary received by that person at the time of his or her retirement.” 1980 Ala. Acts 674, 682 § 12(2).⁹

But serious concerns eventually arose about the fund's financial health. Doc. 50–9, at 11–12. The PFRF Board of Trustees ¹⁰ received several actuarial reports concluding that the PFRF did not have enough resources to meet its long-term obligations, and retiree benefits were being paid out as fast as current contributions were being paid in. Doc. 50–5, at 8–9. In short, the fund was “going broke,” and there was a serious chance that Gadsden's police officers and firefighters “were going to wake up one day and not have a pension plan.” Id. As a result, Gadsden's mayor began considering the possibility of moving PFRF's members into the ERS.

Established in 1945, the ERS is a statewide pension program designed “to provide retirement and other benefits to state employees, state police, and on an elective basis to qualified persons of cities, towns, and quasi-public organizations.” The Retirement Systems of Alabama, http:// www. rsa- al. gov/ index. php/ members/ ers (last visited Aug. 26, 2014). Participation in the ERS is mandatory for all Alabama state employees, as well as for the employees of any Alabama locality that has elected to participate in the program. ¹¹Ala.Code §§ 36–27–4(a)(1), 36–27–6. Gadsden joined the ERS in 1970, and all of its employees—other than its firefighters and its police officers—have since participated in the fund.¹² Doc. 10–8, at 1.

Under the terms of the ERS—as provided by statute—an employee with ten years of “creditable service” ¹³ shall be eligible to retire with benefits upon reaching age 60. Ala.Code § 36–27–16(a)(1)(a).¹⁴ An employee with twenty-five years of creditable service is eligible to retire with benefits regardless of age.¹⁵Id. § 36–27–16(a)(1)(c). After retirement, these employees will receive compensation from the ERS in an amount calculated according to their final pay and their total length of service. ¹⁶

Like the PFRF, the ERS requires mandatory employee contributions to the pension fund. The employee contribution rate has changed over time. All employees initially contributed 3.5% of their total pay.¹⁷ That rate has increased twice: to 4% in 1965,¹⁸ and to 5% in 1975.¹⁹ The contribution rate for firefighters and local police officers was raised separately to 6% in 2001.²⁰ State police officers have had their employee contribution rates raised three times: to 7% in 1957,²¹ to 8% in 1965,²² and to 10% in 1971.²³

In addition to employee contributions, the funding for ERS comes from employer contributions and from investment income. Doc. 47–5 at 33. Although all funds are co-mingled and invested by the ERS leadership, each locality participating in the ERS has a separate account maintained on its own behalf. Doc. 47–1, at 98. Local employers are responsible for making their own contributions at a rate set by the ERS leadership. Ala.Code § 36–27–6(f). The employer contribution rate varies from year to year according to the assets and liabilities of a given locality's individual account. Id.

In 2002, amid concerns about the long-term viability of the PFRF, Gadsden's mayor looked to the City's ERS account for a lifeline. That account, in the mayor's words, was “solid as a rock.” Doc. 50–5, at 10. And in fact, Gadsden's ERS account was so financially sound that, in 2001, it was completely funded; its employer contribution rate, moreover, was set at just 1.51 %. Doc. 47–5, at 202–03. Impressed by the stability of the ERS account, Gadsden's mayor requested that both the police and fire departments appoint a committee to discuss the possibility of moving the PFRF into the ERS. Doc. 47–8, at 10–12.

It should come as little surprise, then, that a majority of PFRF members ultimately agreed that joining the ERS was a prudent choice.²⁴ This consensus was the result of prolonged discussion between the PFRF members and the City. See Taylor v. City of Gadsden, 958 F.Supp.2d 1287, 1304–06 (N.D.Ala.2013). Plaintiffs also had access to the official ERS employee handbook, which explicitly stated that the “member contribution rate is determined by statute and subject to change by the Alabama Legislature.” Doc. 50–27, at 9.

On October 8, 2002, Gadsden issued a resolution that dissolved the PFRF, moving its members, its assets, and its liabilities into Gadsden's ERS account. Doc. 10–8, at 1–2. Saddled with the PFRF's expansive unfunded liabilities, the ERS account quickly went from 100% funded in 2001 to only 58.2% funded by 2007. Doc. 47–5, at 202–03. Over this same period of time, Gadsden's employer contribution rate increased from 1.51 % to 24.54%. Id. And there it lingered for years as the City worked, bit by bit, to pay down the debts acquired from the PFRF. Despite these efforts, the extent of the ERS's unfunded liabilities totaled $50.9 million in 2011. Id. at 202.

B.

The rate increase at issue in this case traces its roots to an Act of the Alabama legislature (“Act 676”) ²⁵ and a subsequent resolution by the City of Gadsden made pursuant to that Act. The economic downturn took its toll on the ERS, which, like all pension programs, is funded in part by investment income. So when state officials reported “the worst performance of the stock market in a rolling 10 years in 175 years,” the Alabama legislature had to find a way to rescue the fund from potential default. See Doc. 47–5, at 34. Its solution was Act 676. The Act sought to shore up the ERS by increasing the contribution rates paid by all Alabama state employees. For example, Alabama law enforcement officers, firefighters, and correctional officers saw their rates increase from 6% to 8.25% in 2011 and then from 8.25% to 8.5% in 2012. Ala.Code § 36–27–59(b)(2).

But by its terms, the Act only concerned the contribution rates of state employees. It gave localities participating in the ERS the option of...