Yeazell v. Copins , 98 Ariz. 109 ( 1965 )

UDALL, Justice

(dissenting) :

I dissent from the majority opinion in this case. If I understand the argument of the majority correctly, it is that the legislature, by subsequent enactment, can modify the original pension terms only if the employee consents thereto. And if a change is favorable to him, by his silence and continuing employment he assents to the modification; if a change is unfavorable to him or subsequent events make is so, his silence and continuing employment have no effect whatsoever and he can at any time, however remote, assert that he never consented to the change and that it impairs the obligation of his “contract”.

The majority opinion is based upon the erroneous premise that there was created upon employment an absolute binding “contract” to a specific pension. Notwithstanding the incorrect impression created by the language of the majority opinion, not a single jurisdiction in the thirty-five that have considered this problem support the “theory” advanced by the majority opinion save the possible exception of Georgia which is not even cited.

The basic question in this case is whether the legislature, having created a public pension system may revise the system, which revision may alter the contributions by or the ultimate benefits to public employees who have not yet retired. A careful examination of the case law reveals the following:

Many of the states follow an old common law concept that a pension is a “gratuity” which can be changed or terminated at will. See Annot., 52 A.L.R.2d 437 (1957) and A.L.R.2d Supp. Service.

Other states have adopted a “contractual” concept but have expressly held that the legislature may change the terms or modify the pension system to improve it or to keep it on a sound basis — i.e., the contractual right is not one going to the specific terms of the system as the majority opinion suggests, but rather a contractual right against unreasonable modification of the pension system. See, e.g., Allen v. City of Long Beach, 45 Cal.2d 128, 287 P.2d 765 (1955), wherein it was said: '

“An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system.” (Emphasis added)

In Kern v. City of Long Beach, 29 Cal.2d. 848, 179 P.2d 799 (1947) the court said:

“ * * * an employee may acquire a vested contractual right to a pension but that this right is not rigidly fixed by the specific terms of the legislation in effect during any particular period in which he serves. The statutory language is subject to the implied qualification that the governing body may make modifications and changes in the system. The employee does not have a right to any fixed or definite benefits, but only to a substantial or reasonable pension.” (Emphasis added)

See also Bekenhus v. City of Seattle, 48 Wash.2d 695, 296 P.2d 536 (1956) ; Harvey v. Allegheny County Retirement Board, 392 Pa. 421, 141 A.2d 197 (1958); Police Pension and Relief Board of City and County of Denver v. Bills, 148 Colo. 383, 366 P.2d 581 (1961).

If the majority had actually applied the law of the “contractual” states (upon which they allegedly relied) they probably would have been compelled to find that the 1952 amendment was valid. An examination of the 1952 amendment reveals the following: The employee’s contribution from his salary was increased from two to five per cent and the pension is now calculated on the basis of the average monthly salary of the last five years’ earnings rather than the last year’s earnings. These two changes standing alone would be a detriment to the employee. However, the 1952 amendment allows an employee to ultimately receive a pension equal to sixty per cent of his last five years’ earnings by working an additional five years beyond the twenty year period. An examination of the problem will reveal that a typical employee who began work before the 1952 change and retires after twenty-five years’ service rather than twenty years’ service will receive, over the remainder of his life span, a pension equal to considerably more than what he would have received under the 1937 Act.

Another change in the law enacted by the 1952 amendment was the provision that gave the widow of the retired member an allowance equal to two-thirds of the monthly pension being paid to the retired member at the time of his death, whereas the Act of 1937 gave the surviving widow an allowance equal to one-third of the monthly pension being paid at the time of the member’s death — or just half as much under the old law. These latter two changes more than offset the two detriments mentioned above. In addition a further provision of the 1952 amendment requires an annual audit and an actuarial study at least every three years in order to maintain the pension system on a sound basis, whereas the Act of 1937 provides neither for an annual audit not for an actuarial study. Although it is difficult to evaluate this requirement in terms of dollars and cents, it certainly cannot be said that such a requirement to insure the soundness of the pension system is not a decided benefit. I therefore feel that the disadvantages incurred by the 1952 amendment were more than offset by other provisions in the same Act representing decided advantages. The majority opinion, although allegedly relying on the “contractual” theory as expressed by California and several other states, completely fails to apply such theory to the case at bar. See exhaustive list of cases in McQuillin, Municipal Corporations, § 12.144 (1963) and Annot., 52 A.L.R.2d 437 (1957) and A.L.R.2d Supp. Service.

Another view taken is that the terms and conditions of public service in office or employment rest in legislative policy rather than contractual obligation, and hence may be changed except insofar as the state constitution specifically provides otherwise. Spina v. Consolidated Police, etc., Pension Fund Comm., 41 N.J. 391, 197 A.2d 169 (1964) . This case also said that pension benefits are not a “gratuity” within constitutional ban against donation of public moneys and that an employee has a property interest in an existing pension fund which the state cannot simply confiscate.

The majority opinion criticizes the terms, “contingent interest” and “expectancy” in Robinson¹ and the terms “in the realm of quasi-contracts” in Denney,² yet it solves the whole problem by merely labeling the matter “contract.” As was stated by the New Jersey court in Spina, supra, “ * * * there is no profit in dealing in labels such as ‘gratuity,’ ‘compensation,’ ‘contract,’ and ‘vested rights.’ None fits precisely, and it would be a mistake to choose one and be driven by that choice to some inevitable consequence.” 197 A. 2d at p. 174. An excellent article in the Western Reserve Law Review by Walter Probert entitled, “Law, Logic and Communication”, describes the various pitfalls courts fall into in this labeling process. A statement from that article is apropos here. “But how can a word like ‘contract’ or all of its associated abstractions give the vital information leading to an intelligent decision.” 9 W. Reserve Law R. 129 (1958) at p. 145.

Perhaps the most thorough analysis of this problem has been made by the New Jersey court in the Spina case. That case involved a legislative amendment requiring 25 years of service and a minimum age of 51 years, instead of the original 20 year's of service and a minimum age of 50 years, for retirement of policemen and firemen on a pension. The employees contended that there was a contractual relationship. The court stated that the legislature may revise pension plans which governmental emiployees are required to join. The couqt could find no decision by the legislature in the pension statutes to part with its power of'revision by thrusting a “contractual” obligation upon municipalities. The court stated:

“This is in harmony with the general approach in our State that the terms and conditions of public service in office or employment res.t »in legislative policy rather than contractual. obligation, and hence may be chailgfed except of course insofar as the State Constitution specifically provides otherwise.”

The employees then argued that the law rejecting their position emerged from the erroneous concept that pension benefits are a “gratuity”, whereas today their compensatory quality is more plainly in view. The court after stating that there is no profit in dealing in labels then met the argument that a contractual approach must be' used because of a constitutional ban against gifts of public moneys.

“We have no doubt that pension benefits are not a gratuity within the constitutional ban against the donation of public moneys. * * * And we think the employee has a property interest in an existing fund which the State could not simply confiscate. Whether the interest thus secured from arbitrary action is limited to the employee’s own contribution or extends to the entire fund and whether it becomes still more secure upon retirement, we need not say. The question is too academic to he pursued, for our Legislature would not think of making off with a fund.” (Emphasis added)

‡ * * * *

“It appears in some cases, notably in ■ California, Georgia, and Washington, that the contract thesis was thought to he required lest the pension benefits fall within the constitutional ban against gifts of public moneys, (citing cases.) We think there is no need to choose between such stark alternatives. A payment is not a gift because it rests only upon legislative policy. It does not offend the Constitution to pay for services merely because the arrangement remains subject to legislative revision dr'• rescission. Government may satisfy even a moral obligation. Indeed, the parent case for the view that pension benefits' rest upon legislative will did not call them a ‘gift,’ but rather an ‘expectancy, created by law, and liable to be revoked or destroyed by the same authority.’ Pennie v. Reis, 132 U.S. 464, 10 S.Ct. 149, 151, 33 L.Ed. 426, 429 (1889).” (Emphasis added)

The court then went on to show that the “contract” approach was unsound.

“The difficulty with the. contract approach is that it cannot withstand the pressures upon it. ' '

“If the contractual obligation of the public employer is really to equal the expectations of - all the rank-and-file members, it must include a guaranty by the employer of the solvency of the fund. Yet, except perhaps for the Georgia case cited above, we have found no case that goes that far. California, which is the leading exponent of the- contract thesis, holds the Legislature may revise a plan eto maintain the integrity of the system/ which, if we correctly read the opinions, means that the public employer does not guarantee the solvency of the plan.”

* * * * * *

“The California cases cited in the paragraph above recognize a legislative power of revision, with the proviso that a benefit that is taken away is reasonably offset by something added. True the needed power in the Legislature to revise a plan without the consent of the parties to the ‘contract’ could be said to be ‘implied,’ but it seems odd to say the State may unilaterally rewrite its own contract or rewrite contracts between its municipal agents and others. We think it more accurate to acknowledge the inadequacy of the contractual concept.” (Emphasis added)

The court concluded:

“ * * * we are satisfied that we should not surprise the Legislature with a decision that it heretofore imposed immutable obligations upon some 200 municipalities to underwrite the solvency of plans with liabilities running into several hundred millions of dollars notwithstanding a long line of cases which assured it that its enactments would remain within its powers to revise.”

Along this same thought it should be observed that the problem presented by this case was the very same issue presented in Robinson. At that time this Court told the legislature it had the power to revise pension systems it created. Now six years later we are telling them that they cannot change or revise the pension system they created but rather that they created absolute binding contracts with the original 1937 Act. The legislature should be able to rely with some degree of certainty upon the decisions of this Court.

In addition to the problems of the contract approach above illustrated by the Spina case, in the case at bar several other problems are raised. If Mr. Yeazell’s pension is to be controlled by the strict “contract” terms of the 1937 Act, certainly he is entitled to a refund of that portion of his contribution which exceeded 2% of his salary. He would be entitled .to a refund,, perhaps with interest, of 3% of his contributions since 1952. If he is not estopped to claim benefits under the 1937 Act in 1962, it should logically follow that he is not estopped from claiming he paid 3% too much for ten years ending in 1962 when he retired. The majority, apparently recognizing this situation, did not want the strict contract thesis approach applied after all. The opinion makes the following unsupported statement:

“His acquiescence in the application of the 1952 amendment during his employment is not alone sufficient to establish a waiver or an estoppel of rights under the 1937 act although he is obviously estopped from being reimbursed or from withdrawing any additional contributions above the two per cent required of the 1937 act.”

No support in law or reason is given for the above statement but rather it appears as a mere expression of judicial will. Language in a recent Montana case is particularly applicable at this point. The court in State ex rel. Perry v. District Court of Fourth Judicial Dist., Mont., 400 P.2d 648 (1965) said:

“Judicial power is never exercised for the purpose of giving effect to the will of the judge. It is always exercised for the purpose of giving effect to the will of the people as that will is expressed in the law.” 400 P.2d at 653.

Also left in a state of confusion are the rights of the other employees already retired. The action below was brought as a class action by Mr. Yeazell and all others similarly situated. The case was tried and the appeal perfected on that basis. The majority opinion completely ignored this phase of the case. Must all others similarly situated now commence an action to determine their pension status? One might also ask whether Robinson and Denney can now claim under this new decision — or are they precluded by the doctrine of res judicata?

Perhaps most serious of the problems raised by the majority opinion are the rights of widows of deceased retired employees who began their service before the 1952 amendment. If the “contract” theory is applied to them their present benefit would be cut in half. Presumably if their right to receive benefits under the terms of the 1952 Act were judicially questioned, the majority would by judicial fiat allow them also to have an “election” to pick that “contract” which is most advantageous to them. Justice Hill’s dissenting language is Bekenhus v. City of Seattle, 48 Wash.2d 695, 296 P.2d 536 (1956) is apropos here when he described the absurd result a court can arrive at by this contractual approach when changes in the pension law result in both detriments and benefits (like the 1952 Arizona amendment in this case). He described it as “Heads, I win; tails, the city loses.”

However, take the situation where an employee retires and “elects” to take under the 1937 Act and shortly thereafter dies. His widow according to the majority opinion would be “forever bound” by her husband’s election and her widow’s benefit would be one half as much as it would be under the 1952 amendment.

It is interesting to note that the appellant never raised nor argued the “strict contract theory” as applied by the majority to the case at bar. It is also interesting to observe that the legislature in their comprehensive legislation on this matter did not in any way provide for an “election” between the 1937 Act and the 1952 amendment. Correspondingly there is no provision made for the additional financial burden that will now be placed upon the fund by others similarly situated to Mr. Yeazell as a result of the majority opinion.

I would hold, as do nearly all jurisdictions having decided this issue, that the legislature can make reasonable changes as may be necessary under changing conditions to maintain the integrity and soundness of the pension system. As long as the changes are not unreasonable and arbitrary on their face, it is not a matter for further judicial inquiry.

It is submitted that the majority opinion in this case has no support in reason or logic nor the case law (not even the cases allegedly relied upon) and will create problems far beyond the immediate controversy.

For these reasons I dissent from the majority opinion and would affirm the judgment of the trial court.

1 . 85 Ariz. 384, 339 P.2d 739 (1959).

2 . 84 Ariz. 394, 330 P.2d 1 (1958).