December 11, 2014
Yesterday the New Hampshire Supreme Court handed down a ruling in the case of Professional Firefighters of New Hampshire, et al v State of New Hampshire; representing the culmination of nearly three and a half years of legal proceedings that sought to answer the question: how far can the state go in reforming pensions? The answer: pretty far. The Supreme Court unanimously ruled that increases can be made in employee contribution rates for all employees, regardless of how long they have been working. The increase in employee contribution rates were a key component of the package of pension reform measures that passed in 2011.
The pension reforms measures passed in 2011 took a number of steps to shore up what was, and still is, among the worst funded state pension systems in the country. Reforms included changing the way pension payouts were tabulated, such as extending the number of years used to calculate the final average salary from the last three to last five, how much overtime could be counted, and increasing employee contribution rates.
Additional suits had been filed (and are still pending) regarding other facets of reform measures, but this ruling on this case, commonly referred to as ‘Firefighters I’ only dealt with the changes made to the contribution rates for employees. Those changes increased rates for employees and teachers from 5% to 7% of salary, firefighters from 9.3% to 11.55% and police from 9.3% to 11.8%. However, the key point in each of these suits is the determination of when ‘vesting’ occurs. Once a person is vested, it means they have property rights that cannot be violated.
The Unions’ Arguments:
In June 2011, shortly after the increase in contribution rates took effect, a group of unions filed a petition in Merrimack County Court, arguing that these changes were unconstitutional. They argued that ‘members become vested in their NHRS benefits upon commencement of permanent employee status” In short, as soon as an employee makes it through their probationary period, how his or her pension benefits are accrued or contributed to on that day can never be changed.
This claim rested heavily on the precedent set in State Employees’ Association v Belknap County. In that case, a number of county employees were not enrolled in the New Hampshire Retirement system, despite several long standing orders from the State Treasury to do so. In that ruling, the court stated that “(retirement)benefits constitute a substantial part of an employee’s compensation and become vested upon the commencement of permanent employee status.” The use of the word ‘compensation’ was critical to the union’s case, as there is substantial judicial precedent in regarding compensation as contractual. With the Belknap ruling using the word ‘compensation’ in describing retirement benefits, the unions argued that retirement benefits were in fact a contract, and therefore changes made by the legislature were in violation of the Contract Clauses both in the U.S. and New Hampshire Constitutions.
The State’s Arguments:
The state argued that the legislation was not a binding contract, and that the only contract formed is the one once the employee retires and begins collecting his or her pension. If that is the case, then changes could be made to the pension system, such as increasing the amount of money an employee must contribute toward it, right up until the moment an employee retires.
The Lower Court Ruling:
Judge McNamara, of Merrimack Superior Court ruled that vesting occurred at ten years; not as some sort of Solomonic decision, but by looking at the letter of the laws governing the New Hampshire Retirement System itself. The RSA in question, 100-A, states that vesting occurs after 10 years, but crucially does not make mention of retirement benefits being considered as part of compensation.
In his ruling McNamara disagreed with the unions’ arguments on the basis of the Belknap County case. McNamara noted the Belknap decision found that RSA100-A only “(E)ntitles government employees to receive benefits in addition to salary, and that both wages and benefits are a substantial part of the employees’ compensation.” He went on to state that the issue at the heart of the case, the ability of the state to alter those benefits, was not presented in any of the case law cited by the unions.
The Supreme Court Ruling:
Both the State and the Unions appealed the decision to the Supreme Court. Leaving the issue of when vesting occurs aside, the Justices went to the heart of the matter: does language of the law concerning pensions constitute a contract?
Relying on previous case law, the Justices relied on the “Unmistakability Doctrine”, which requires the court to determination whether a challenged law has evidence of “the clear intent of the state to be bound to particular contractual obligations.” After review of the language of the statute that establishes the contribution rates, the court found that “the legislature did not unmistakably intend to establish NHRS contributions rates as a contractual right that cannot be modified.” As such, the Court ruled unanimously in favor of the state. With no contractual rights established in the law, the state can change the contribution rates for all employees.
What Does this Mean?
In short, the reforms of the past few years will remain in place. Though the Court only ruled on one narrow piece of the reform package, the impact of the ruling extends to the two other unsettled legal challenges. It its conclusion, the Court found “(T)here is no indication that … the legislature unmistakably intended to bind itself from prospectively changing the rate of NHRS member contributions to the retirement system.” Taking that as a guidepost, a reading of the legal language of the other contested reform measures, turns up nothing that would ‘unmistakably’ establish a contract.
In addition, the bulk of the other reforms made in 2011 were made to those who had not yet hit that critical 10 year mark. Those changes are currently being litigated in the ‘Firefighters II’ lawsuit. Firefighters II is currently stayed, pending the outcome of this weeks ruling and a third suit made against the reforms made to the system in 2008. That third suit, the HB1645 case, which deals with many of the same questions that Firefighters I and II does, was heard before the Supreme Court last month, with no timeline for when a ruling will be handed down.