Pension reforms upheld again by State Supreme Court

Josh Elliott-Traficante

January 16, 2015

Today the New Hampshire Supreme Court issued a ruling in the case of American Federation of Teachers –New Hampshire et al v State of New Hampshire, which upheld pension reforms made in 2007 and 2008.


This suit, brought in 2009 by most of the state’s public sector unions, was against two particular changes made to the system. The first dealt with changing the definition of ‘earnable compensation’, by removing ‘other compensation’. In effect, it meant that special duty pay, for example, could not be used in calculating the pension payout. The second dealt with the method of funding cost of living adjustments (COLAs), specifically the move of $250 million from the Special Account into the rest of the trust fund and the elimination of annual COLAs. Both were efforts to shore up the financial stability of the New Hampshire Retirement System (NHRS).

The Unions’ Arguments

The unions argued that these moves impaired the rights of their members, which they were vested in upon full time employment. Changing the terms of how benefits were accrued and the effective halting of granting COLAs was a breach of contract. Likewise, these moves also constituted illegal taking by the government depriving members of the monetary gain these provisions would grant them.

The State’s Arguments:

The state argued that the statutes changed by the law did not constitute a contract. If they did not constitute a contract, then there could be nothing that could be illegally taken from union members. The employees were only vested in their retirement benefit once they retired. In addition, the plaintiffs did not show either the changes constituted a substantial impairment, or did they prove it was retroactive.  In regards to the COLA question, that by its very nature the COLA was based on a contingency, and not a contract. Even if it was a contract, the changes were reasonable and necessary (established as a key consideration by legal precedent for contract modification ) because without the change, the plan’s tax exempt status was jeopardized.

The Lower Court:

Like in the other pension reform cases, the lower court found that both the state and the unions were wrong in their arguments. Relying on the statutes governing the NHRS the court found that vesting both occurred at 10 years and that created a contract. As such, the changing the definition of earnable compensation did constituted breaking a contract, but only for vested employees. The changes to the COLA, though also breaking a contract, were necessary and reasonable to preserve tax exempt status with the IRS.

The Supreme Court:

When ruling in this case, the Supreme Court relied on the Unmistakability Doctrine’, just as it did in its pension ruling last December. Under the ‘unmistakability doctrine’, the court, in determining if a law constitutes a contract or not, must find evidence that the legislature meant to create a contract. “(A)bsent some clear indication that the legislature intends to bind itself contractually, the presumption is that a law is not intended to create private contractual or vested rights.”

Unlike the ruling on contribution rates, the Court had to deal with the issue of the word ‘vesting’. Rather than using the 10 year mark as the lower courts had done, the Supreme Court on the relied on the precedent set by the First Appellate Court, which had found that “when used in the context of a pension plan, the terms ‘vesting’ and ‘contractual’ are not synonymous and references to ‘vesting’ do not necessarily create a contract.” Looking the language that concerns vesting, the Court found “no unmistakable language that the legislature intended that once a member ‘vests’ that a contractual commitment has been established.” ‘Vesting’ in the sense that it is used by the NHRS does not create a contract.

With the vesting question dispatched, the Court then looked at the statutory language for the definition earnable compensation, and found, again, no unmistakable intent by the legislature to bind itself contractually. In looking at the statues concerning COLAs, the Court came to the same conclusion.

Going Forward:

There is still one pension case left outstanding; it had been stayed pending the outcome of these two cases. With this ruling firmly establishing that the use of the term ‘vesting’ does not in and of itself create a contract, and the application of the ‘unmistakability doctrine’ in both this case and in December’s ruling, all of the recent pension reforms are here to stay.

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