Local 290 v. SEPTA ( 1998 )

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
5-27-1998
Local 290 v. SEPTA
Precedential or Non-Precedential:
Docket 96-1760
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Recommended Citation
"Local 290 v. SEPTA" (1998). 1998 Decisions. Paper 122.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/122
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Filed May 27, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 96-1760
TRANSPORT WORKERS UNION OF AMERICA, LOCAL
290, BY AND THROUGH ITS GUARDIAN AD LITEM,
NICHOLAS R. FABIO; LEONARD F. BROWNA;
WILLIAM HAGGERTY,
Appellants
v.
SOUTHEASTERN PENNSYLVANIA TRANSPORTATION
AUTHORITY; SOUTHEASTERN PENNSYLVANIA
TRANSPORTATION AUTHORITY RETIREMENT PLAN FOR
SUPERVISORY, ADMINISTRATIVE AND
MANAGEMENT EMPLOYEES
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civil Action No. 96-cv-00814)
Argued October 14, 1997
BEFORE: STAPLETON, ALITO and ROSENN,
Circuit Judges
(Opinion Filed May 27, 1998)
Alaine S. Williams (Argued)
Catherine M. Reisman
Willig, Williams & Davidson
1845 Walnut Street
24th Floor
Philadelphia, PA 19103
Attorneys for Appellants
J. Freedley Hunsicker, Jr. (Argued)
Michael D. Homans
Drinker, Biddle & Reath
1345 Chestnut Street
Philadelphia National Bank Building
Philadelphia, PA 19107-3496
Attorneys for Appellees
OPINION OF THE COURT
STAPLETON, Circuit Judge:
Plaintiffs Transport Workers Union of America, Local 290
("Transport Workers"), Leonard F. Browna, and William
Haggerty instituted this action against Southeastern
Pennsylvania Transportation Authority ("SEPTA") and
SEPTA's Retirement Plan for Supervisory, Administrative
and Management Employees ("SAM Plan"). Plaintiffs claim
that defendants violated the Contract Clauses of the United
States and Pennsylvania Constitutions by modifying the
SAM Plan in August 1995 to require, as a condition of
participation, a contribution of employee earnings to the
Plan. On cross-motions for summary judgment, the district
court granted defendants' motion and denied plaintiffs'
motion. This appeal followed. We will affirm.
I.
SEPTA was created pursuant to the Metropolitan
Transportation Authorities Act of August 14, 1963 ("MTA
Act") and is the sponsor of the SAM Plan, which was
established by SEPTA in 1965 and covers approximately
2,300 supervisory and management-level employees. SEPTA
was authorized to establish the SAM Plan by the MTA Act,
which provides that:
There shall be established and maintained by the
authority a pension and retirement system to provide
for payments when due under such system or as
modified from time to time by resolution of the
[authority's] board. For this purpose, both the board
and the participating employees shall make such
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periodic payments to the established system as may be
determined by resolution.
74 Pa. Cons. Stat. Ann. S 1724(c).
Prior to the events giving rise to this litigation, the SAM
Plan provided that SEPTA would "contribute . . . such
amounts . . . as are required, in accordance with the
funding policy established by the Board under the terms
and conditions of [the] Plan, to fund the Benefits provided
under [the] Plan." App. at A77. The Plan further provided
that the "Board shall have the power, at any time and from
time to time, . . . to modify, alter or amend the Plan and/or
Master Trust in any manner which it deems desirable
provided that no amendment . . . may affect the rights,
duties or responsibilities of the Trustee without its prior
written consent." App. at A116. Prior to October 8, 1995, no
employee contribution had been required of employees
covered by the SAM Plan.
Effective in December 1995, the SAM Plan was amended
by the Board to require that employees covered by the Plan
would contribute to it in the future .9% of their earnings up
to the Social Security covered compensation level and 1.1%
of their earnings above that level. The benefits provided by
the Plan were not altered in connection with this
amendment. The right to benefits vested as of December
1995 was not affected but payment of the contribution in
the future was a condition of accruing any additional
benefits under the Plan. Simultaneously, the Board
approved, effective October 1995, a three percent wage
increase for the individual plaintiffs and others similarly
situated.
Plaintiffs' suit seeks declarative and injunctive relief from
the employee contribution requirement. Their complaint
asserts that the Board's amendment of the Plan, and the
MTA Act under which it was authorized, both violate the
Contract Clauses of the United States and Pennsylvania
Constitutions.
II.
The United States Constitution provides, in relevant part,
that "[n]o state shall enter into any . . . Law impairing the
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Obligation of Contracts." U.S. Const. art. I, S 10. In order to
prove a violation of this constitutional provision, a plaintiff
must demonstrate that a "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)). Thus, Contract Clause analysis requires
three threshold inquiries: (1) whether there is a contractual
relationship; (2) whether a change in a law has impaired
that contractual relationship; and (3) whether the
impairment is substantial. See Romein, 503 U.S. at 186. If
it is determined that a substantial impairment of a
contractual relationship has occurred, the court must
further inquire whether the law at issue has a legitimate
and important public purpose and whether the adjustment
of the rights of the parties to the contractual relationship
was reasonable and appropriate in light of that purpose.
See Allied Structural Steel Co. v. Spannaus, 438 U.S. 234,
242-44 (1978); Nieves v. Hess Oil Virgin Islands Corp., 819
F.2d 1237, 1243 (3d Cir. 1987). If the impaired contractual
relationship is between private parties, the court will defer
to the legislative judgment concerning the importance of the
public purpose and the manner in which that purpose is
being pursued. See Energy Reserves Group, Inc. v. Kansas
Power & Light Co., 459 U.S. 400, 412-13 (1983). If the state
is a party to the contract, "complete deference to a
legislative assessment of reasonableness and necessity is
not appropriate because the State's self-interest is at
stake." United States Trust Co. v. New Jersey, 431 U.S. 1,
26 (1977).
The district court granted summary judgment for
defendants on their federal constitutional claims because it
concluded that the SEPTA resolution modifying the SAM
Plan did not "constitute an exercise of legislative power,"
Op. at 11, and, accordingly, was not a "law" within the
meaning of the Contract Clause. We find it unnecessary to
decide this issue. We conclude that even if the Plan is
regarded as establishing a contractual relationship and the
Plan amendment is considered a "law," plaintiffs have failed
to demonstrate that the contractual relationship has been
"substantially impaired."
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"Contracts enable individuals [and public entities] to
order their . . . affairs according to their particular needs
and interests. Once arranged, those rights and obligations
are binding under the law, and the parties are entitled to
rely on them." Allied Structural, 438 U.S. at 245. The
purpose of the Contract Clause is to protect the legitimate
expectations that arise from such contractual relationships
from unreasonable legislative interference. Thus, we must
determine whether there has been a substantial
impairment of a contractual relationship by inquiring
whether legitimate expectations of the plaintiffs have been
substantially thwarted. We conclude that the Plan
Amendment did not frustrate any legitimate expectation of
the plaintiffs.
Plaintiffs' argument that the MTA Act itself violates their
rights under the Contract Clause need not detain us long.
The only legitimate expectations plaintiffs have identified
are those allegedly arising from the Plan. The Plan was
adopted pursuant to the authority conferred by the MTA
Act and, therefore, did not exist prior to its enactment. It
necessarily follows that the MTA Act did not substantially
impair any contractual expectations of the plaintiffs.
Turning to the plaintiffs' expectations under the Plan, we
first note that the Act by which it was authorized expressly
contemplated that the provisions of any pension and
retirement system created thereunder would be subject to
modification from time to time by the Authority's Board and
that the employees covered might be required by resolution
of the Board to make contributions. See 74 Pa. Cons. Stat.
Ann. S 1724(c). The Plan itself also expressly provided that
the Board was authorized to amend the terms of the Plan
"in any manner which it deems desirable." App. at A116.
Moreover, the Plan document contains an elaborate
procedure for terminating the Plan. While the document
evinces an intent to continue the Plan "indefinitely," it also
reserves the right to "discontinue, suspend or reduce
[SEPTA's] contributions [to the plan], or to terminate the
Plan and/or Master Trust and/or any participating plan
therein." App. at A117. The ability to reduce state
contributions or terminate the Plan entirely also supports
the proposition that SEPTA reserves the right to alter the
5
scheme of funding embodied in the Plan. These provisions
of the SAM Plan and the enabling statute give notice that
the terms of the Plan are alterable by SEPTA and that an
employee contribution may well be required as a condition
of participation in the Plan. Under these circumstances, an
employee's reasonable expectation from the Plan contract
cannot include a guarantee that an employee contribution
would never be required.
In support of their contention that they did have
legitimate expectations that were thwarted by the Board's
amendment, plaintiffs rely primarily on the decision of the
Supreme Court of Pennsylvania in Association of
Pennsylvania State College and University Faculties v. State
System of Higher Education, 479 A.2d 962 (Pa. 1984)
("APSCUF "). The plaintiffs there were covered by
Pennsylvania's State Employees Retirement Fund, a
statutory retirement program mandated for certain state
employees. See 71 Pa. Cons. Stat. Ann. S 5301 et seq. The
terms of that program were established in the statute. As
originally adopted, the statute required an employee
earnings contribution of 5% with the proviso that "in no
case shall any member's rate . . . be greater than [the]
contribution rate on the effective date of [the Code]."
APSCUF, 479 A.2d at 963. The APSCUF litigation arose as
a result of a subsequent legislative amendment to the
statute that required an additional contribution from
covered employees of 1.25% of their earnings. The "only
effects [of the amendment were] to increase the contribution
required by members and to save the Commonwealth one
percent (1%) of its budgeted payroll. The dollar amount of
retirement benefits remain[ed] the same; members [were]
simply required to pay more for each pension dollar they
[would] eventually receive." Id. at 964-65. The Supreme
Court of Pennsylvania held that this amendment violated
the Contract Clause of both the federal and state
constitutions.
Plaintiffs read APSCUF as establishing a rule that under
the Contract Clause of the federal constitution, a public
employee covered by a pension plan is entitled to the
benefits existing at the time her employment commenced
without regard to whether the employer has reserved the
6
right to modify the plan at any time. If APSCUF established
such a rule, we would not be bound by it. Whether a
contract was formed and what terms were included for
purposes of the Contract Clause are federal questions. See
General Motors Corp. v. Romein, 503 U.S. 181, 187 (1992).
But we do not understand the Pennsylvania Supreme Court
in APSCUF to be saying anything as novel as plaintiffs
suggest. Contrary to plaintiffs' suggestion, that case does
not hold that the terms of a public pension plan are
irrelevant to a determination of whether rights protected by
the Contract Clause have been substantially impaired.
It is helpful to place APSCUF in historic perspective. In
Penne v. Reis, 132 U.S. 464 (1889), the Supreme Court
held that public employee pension programs constitute
gratuities that a state may freely revoke. While Penne has
never been expressly overruled, most state supreme courts
subsequently rejected the "gratuity" approach in favor of an
approach that viewed such programs as creating implied-
in-fact unilateral contracts. See Parker v. Wakelin, 123 F.3d
1, 6 (1st Cir. 1997). The modern trend in those courts has
thus been to protect pension rights on the theory that a
state's promise of pension benefits represents an offer that
can be accepted by the employee's performance. See id.They have taken different views, however, regarding the
point at which rights under public pension programs
become protected from change where no right to modify is
expressly reserved by the employer. See, e.g. , Kestler v.
North Carolina Local Gov't Employees' Retirement System,
48 F.3d 800, 804 (4th Cir. 1995) (no contract rights prior
to retirement); Petras v. State Bd. of Pension Trustees, 464
A.2d 894, 896 (Del. 1983) (rights not subject to change
after conditions for vesting under terms of plan satisfied);
State of Nevada Employees Assoc., Inc. v. Keating, 903 F.2d
1223, 1227 (9th Cir. 1990) (all employees have contract
rights "subject to reasonable modification"); Oregon State
Police Officers' Ass'n v. Oregon, 918 P.2d 765, 773 (Or.
1996) (contract formed "on acceptance of employment or
after a probationary period"); Booth v. Sims, 456 S.E.2d
167, 184 (W. Va. 1995) (contract formed "after employees
have substantially relied to their detriment").
"[P]ublic employee retirement benefits in Pennsylvania are
viewed as being part of a contractual agreement between
7
the public employer and the employee." Newport Township
v. Margalis, 532 A.2d 1263, 1265 (Pa. Commw. 1987)
(citing Wright v. Allegheny County Retirement Bd., 134 A.2d
231 (Pa. 1957)). The terms of the contractual agreement in
APSCUF did not include a reservation by the employer of a
right to modify or terminate the plan. To the contrary, the
terms of the plan specified a rate for the employees'
contributions and expressly provided that that rate should
not be exceeded. The court had no problem determining
that the legislative amendment would constitute a Contract
Clause violation for those employees who had accepted the
state's unilateral offer by serving until the retirement
eligibility requirements have been met. The more serious
issue was whether the same was true with respect to those
employees who had not satisfied those requirements. The
court held that "non-vested state employees are entitled to
the same constitutional protection as vested employees."
APSCUF, 479 A.2d at 965. This conclusion was consistent
with traditional contract principles; when an offeror invites
an offeree to accept by rendering a performance a unilateral
contract is formed when performance begins. See
Restatement of Contracts (Second) S 45(1).
The Supreme Court of Pennsylvania said nothing in
APSCUF about whether state employees covered by a
pension program expressly reserving the right to amend or
terminate their rights have a legitimate contractual
expectancy that can be substantially impaired for purposes
of Contract Clause analysis. It would be inconsistent with
traditional principles of contract law to simply ignore such
a reservation. As the Restatement explains, the rule vesting
unilateral contract rights at the beginning of performance
"is designed to protect the offeree in justifiable reliance on
the offeror's promise, and the rule yields to a manifestation
of intention which makes reliance unjustified. A reservation
of power to revoke after performance has begun means that
as yet there is no promise and no offer." Restatement of
Contracts (Second) S 45, Comment (b).
As we have noted, the purpose of the Contract Clause is
to allow parties to agree upon their respective rights and
obligations and then to protect their expectations from
legislative interference. Given this objective, we conclude
8
that the Contract Clause should not be applied in a manner
that would produce a result in direct conflict with the terms
of the parties' bargain.
As a matter of federal law, we are aware, of course, that
ERISA statutorily prohibits modifications of benefits after
they have accrued. We are also aware that the Court of
Appeals for the First Circuit has recognized "an emergent
common-law rule" that express reservations of the power to
modify and terminate are ineffective as to those employees
who have satisfied the plan requirements for retirement
benefits. See McGrath v. Rhode Island Retirement Bd., 88
F.3d 12, 18 (1st Cir. 1996) (collecting cases). We have
found no case, however, holding that an express
reservation of a right to modify is ineffective with respect to
employees who have not satisfied the plan requirements for
retirement benefits. It necessarily follows that we have
found no case holding that the rights of such employees
under the Contract Clause were violated by an exercise of
such an express reservation. Indeed, the First Circuit Court
of Appeals in McGrath held to the contrary, see 88 F.3d at
20, and its conclusion is consistent with the other case law
we have found dealing with reservations of the right to
amend. See, e.g., City of Charleston v. Public Service
Comm'n of West Virginia, 57 F.3d 385, 394 (4th Cir. 1995)
(holding that a state law did not impair a public contract
when the contract expressly stated that its terms were
subject to legislative regulations); National Ass'n of Gov't
Employees v. Commonwealth, 646 N.E.2d 106, 110-11
(Mass. 1995) (collective bargaining agreement not impaired
where legislature reserved power to determine employee
health insurance contribution rate); Helicon Corp. v.
Borough of Brownsville, 449 A.2d 118, 121 (Pa. Commw.
1982) (cable television contract not impaired by city rate
regulation where contract expressly contemplated legislative
changes).
In short, we conclude that SEPTA employees enrolled in
the SAM Plan had no reasonable expectation when they
joined the Plan that a contribution would not be required
as a condition for future participation in the Plan.1 It
_________________________________________________________________
1. Note further that the employee earnings contribution requirement is
prospective in effect. See App. at A78. Thus, there is no allegation in
this
9
necessarily follows that there has been no violation of the
Contract Clause of the federal Constitution.
III.
The Contract Clause of the Pennsylvania Constitution
provides that "[n]o . . . law impairing the obligation of
contracts . . . shall be passed." Pa. Const. art. I, S 17. We
are, of course, bound to apply this provision in the same
manner it would be applied by the Supreme Court of
Pennsylvania. See United Mine Workers of America v. Gibbs,
383 U.S. 715, 726 (1966). That court has held that it is
generally to be applied in the same manner as its federal
counterpart. See, e.g., First Nat'l Bank of Pennsylvania v.
Flanagan, 528 A.2d 134, 135 n.1 (Pa. 1987). Based on this
fact and APSCUF, we believe the Supreme Court of
Pennsylvania would reach the same conclusions in this
case with respect to the Pennsylvania Contract Clause as
we have reached in the preceding section with respect to
the federal Contract Clause.
IV.
The judgment of the district court will be affirmed.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
case that employees whose benefits under the Plan have fully vested will
be affected by the addition of a contribution requirement. Cf. McGrath v.
Rhode Island Retirement Bd., 88 F.3d 12, 20 (1st Cir. 1996) (rights under
retirement plan with express reservation clause not subject to Contract
Clause challenge until employees' rights have vested).
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