By Erica Shelley Nelson and Brennen Johnson
In two linked lawsuits filed by the Washington Education Association against the Washington Department of Retirement Systems, the Washington Supreme Court determined that the State may repeal the gain sharing benefits and certain cost of living adjustments attached to pension plans of State employees. A coalition of organizations representing state employees filed the lawsuits in an effort to invalidate the legislature’s actions in 2007, and 2011, that repealed these benefits. However, the Court determined that the State was allowed to repeal the benefits because the laws that initially conferred the benefits did so gratuitously, anticipated a possible repeal, and did not bestow contract rights upon employees.
In 1995, the Washington State Legislature enacted UCOLA, a cost of living adjustment scheme that replaced the then-current system of ad hoc increases in State employee pensions with a monthly increase based on years of service. On top of the monthly increase to pension payments that was based on years of service, UCOLA caused the amount of the monthly increase to grow by three percent annually. Due to the economic boom of the 1990s, the legislature also enacted a gain sharing program. Through this program, State employee retirees would share in excess income generated by investments that the State made in order to fund their pensions. Both of these laws contained provisions stating the following: “The legislature reserves the right to amend or repeal this section in the future and no member or beneficiary has a contractual right to receive this postretirement [benefit] not granted prior to that time.”
When investment returns slowed down in the next decade and the economy fell into recession, the legislature determined that it was time to repeal or amend the laws that bestowed these pension benefits upon retirees. In 2007, the State repealed the gain sharing program entirely. In 2010, the State also repealed UCOLA and implemented a system where retirees would continue to receive monthly increases in pensions, but those monthly increases would not gain an additional three percent each year.
The coalition of state employee groups challenged the repeal of these laws. They asserted that repealing these laws violated the State Constitution by impairing existing contracts between the State and its employees. To support their argument, they characterized the benefits from UCOLA and the gain sharing program as incentives offered to employees by the State in order to acquire their service.
The State argued that the statutes that conferred the benefits were not part of the employees’ contracts because the laws themselves stated that “no member or beneficiary has a contractual right to receive this postretirement [benefit].” It also argued that, even if the statutes were part of State employees’ contracts, the repealing of the statutes would not impair any contract because the laws themselves included provisions allowing the legislature to amend or repeal them.
The Court agreed with the State and determined that the legislature did not impair any contract rights between the State and its employees when it repealed the laws. In order to determine if the State has impaired a public contract, the court considers three factors: First, whether a contractual relationship exists; second, if legislation has substantially impaired that relationship; and third, whether the impairment is reasonable and necessary to serve a legitimate public purpose. Applying these factors to the facts surrounding the repeal of these laws, the Court explained:
The repeal of [these laws] could never substantially impair existing contractual rights because a repeal of the program[s] was expressly anticipated by the language of the contract… The parties are in fact arguing over the enforceability of the reservation clause[s] contained in the original… legislation.
The Court further concluded that the reservation clauses, which allowed the legislature to repeal the laws, were valid. It explained that the enforceability of a reservation clause is linked to the degree of specificity contained in the clause. “Here,” the court concluded, “the legislature could not have been more explicit in reserving the power to amend the statute[s] and disclaiming any grant of contractual rights.”
Although the Court determined that the repeal of these laws did not impair any contracts, it explained that the legislature could still impair contracts in violation of the Constitution by the initial enactment of a law containing a reservation clause. It then outlined how a law might impair a preexisting contract if the law modified a prior benefit without providing “comparable advantages” or a “corresponding benefit.” However, the Court determined that the initial enactment of UCOLA and the gain sharing statute did not impair the prior existing contract because, “in spite of [their] reservation clause[s], [the laws] represented a favorable modification to the employees’ contract with the State.”
Ultimately, the Court determined that the legislature did not violate the State Constitution by repealing UCOLA and the gain sharing statute because both laws contained express language allowing for their repeal.
The Court was clearly persuaded by the reservation clauses that gave the State a fairly expansive right to modify or repeal the UCOLA and gain sharing statutes at some point in the future. Even though the Court thoroughly analyzed the facts in this case, the result does not sit well. Numerous State employees who were receiving the cost-of-living adjustments and gain-sharing as part of their compensation plan were stripped of these incentives once the statute was unilaterally repealed. Presumably, State employees receiving these benefits relied upon the economic incentives in exchange for their continued service with the State. This decision strips such employees of those benefits. Moreover, this case paves the way for legislation with similar reservation clauses that would essentially give the State the authority to terminate other benefits, pension or otherwise, of its State employees.
