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Anchorage v. Gallion (8/15/97), 944 P 2d 436
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Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska, 99501,
telephone (907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
MUNICIPALITY OF ANCHORAGE, )
) Supreme Court Nos. S-7331/7591
Appellant/Cross-Appellee, )
) Superior Court No.
v. ) 3AN-94-8592 CI
)
JACK GALLION, JOHN YOUNG, )
CARROLL GRANT, ANTHONY ) O P I N I O N
PROVOST, DOUGLAS K. BOHAC, )
and ANCHORAGE POLICE AND FIRE ) [No. 4869 - August 15, 1997]
RETIREES ASSOCIATION, )
)
Appellees/Cross-Appellants,)
)
v. )
)
BOARD OF TRUSTEES OF THE )
ANCHORAGE POLICE & FIRE )
RETIREMENT SYSTEM, )
)
Cross-Appellee. )
________________________________)
Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Anchorage,
Dana Fabe, Judge.
Appearances: Susan Wright Mason and Bruce E.
Gagnon, Atkinson, Conway & Gagnon, Anchorage,
and George M. Newsham, Assistant Municipal Attorney, and Mary K.
Hughes, Municipal Attorney, Anchorage, for Appellant/Cross-Appellee
Municipality of Anchorage. Peter J. Maassen, Ingaldson Maassen,
P.C., Anchorage, and Peter Gruenstein, Gruenstein, Hickey &
Stewart, Anchorage, for Appellees/Cross-Appellants. Robert D.
Klausner, Klausner & Cohen, P.A., Hollywood, Florida, and Parry
Grover, Davis, Wright, Tremaine, Anchorage, for Cross-Appellee,
Board of Trustees of the Anchorage Police and Fire Retirement
System.
Before: Compton, Chief Justice, Rabinowitz,
and Eastaugh, Justices. [Matthews, and Fabe, Justices, not
participating.]
EASTAUGH, Justice.
I. INTRODUCTION
Does Anchorage Ordinance (AO) 94-95, which amended the
Anchorage Police and Fire Retirement System (APFRS), violate Alaska
Constitution article XII, section 7 by diminishing or impairing
"accrued benefits"of some APFRS members? The superior court
concluded that it does, and granted summary judgment to APFRS
members who brought a class action against the Municipality of
Anchorage. The superior court also awarded attorney's fees to the
class. We agree that AO 94-95 violates article XII, section 7. We
remand for further proceedings regarding the attorney's fees award.
II. FACTS AND PROCEEDINGS
A. Facts
By ordinance adopted in 1968, the predecessor of the
Municipality of Anchorage (MOA) created the APFRS to provide
disability, retirement, and death benefits to MOA's police and fire
department employees. The ordinance is codified in Anchorage
Municipal Code (AMC) 03.85.010-.290 (1993). [Fn. 1]
The APFRS presently consists of three plans; each has
different benefits and eligibility requirements. See AMC
03.85.100-.150 (Plans I and II); AMC 03.85.200-.290 (Plan III).
Plan I became effective July 1, 1968. Its enrollment closed when
Plan II became effective July 1, 1977. Plan II enrollment closed
when Plan III became effective April 17, 1984. Except for a brief
period in 1984 when members of Plans I and II could enroll in Plan
III, a member of one plan could not enroll in a different plan.
AMC 03.85.020.
Each plan was funded by contributions from its members
and MOA. An independent actuarial evaluation of Plans I and II
must be made no less frequently than every two years to determine
the contributions required to "maintain Plans I and II as
actuarially sound . . . ." AMC 03.85.100(G). For Plan III, an
independent actuarial valuation must be conducted every year. AMC
03.85.210(A).
Before passage of AO 94-95, AMC 03.85.100(C) required MOA
to contribute "additional monies to [Plans I and II] in an amount
to assure that the fund is at all times financially sound." In
addition, AMC 03.85.210(B) states in part that "[i]f additional
monies are necessary to assure that Plan III is financially sound
at all times and the member's contribution rate has already been
set at the maximum, then Anchorage shall be solely responsible for
contribution of such additional monies."
The APFRS is a defined benefit system, paying retired
members monthly retirement benefits of a specified percentage of
their monthly compensation, multiplied by the number of years of
credited service. AMC 03.85.110(A). Members of Plans I and II
will receive 2.5% of their highest average monthly compensation
multiplied by the number of years they were plan members. AMC
03.85.110(A), AMC 03.85.015(A). Payments of these retirement
benefits are guaranteed for life. AMC 03.85.110(F).
The APFRS is administered by an eight-member Retirement
Board; four members represent MOA, two members represent the Police
Department, and two members represent the Fire Department. AMC
03.85.030-.040. The Board is the "final authority in all matters
pertaining to the system"and is authorized to "recommend to the
Assembly any changes to [the APFRS] that may become necessary to
carry out the intent of [the APFRS]." AMC 03.85.040(A) & (F).
In February 1993 the Board adopted a "Statement of
Investment Policy"for the APFRS. The statement announced this
"Investment Goal":
The investment of assets shall be accomplished
with a view towards safety of principle [sic], and income from
investments will be utilized to either reduce contributions,
increase benefits or both.
The Board's statement adopted "Investment Objectives,"one of which
provided: "Maintain a maximum of 120% funding of the retirement
systems pension benefit obligation over time." According to the
APFRS executive director, since its inception all assets of APFRS
"have been accounted for and invested as system assets. Actuarial
valuations have been done to establish the liability for potential
future benefits."
A review of the entire system [Fn. 2] and its separate
parts as of January 1, 1994, showed that Plan I was funded at 135%,
with Plan I assets exceeding Plan "projected liability"by
approximately $29,277,000. [Fn. 3] It showed that Plan II was
funded at 112%, with Plan II assets exceeding Plan II projected
liability by approximately $6,175,000. It also showed that Plan
III was 89% funded, with projected liabilities exceeding assets by
approximately $15,660,000. Based upon this evaluation, the actuary
recommended that no further contributions be made to Plans I and
II, but that MOA continue funding Plan III.
In May 1994 the Anchorage Assembly enacted AO 94-95 which
amended two sections of the AMC governing the APFRS. Anchorage
Ordinance 94-95 amended AMC 03.85.100(C) as follows:
The Municipality of Anchorage, in addition to
the payroll deductions of members, shall contribute additional
monies to the [PLAN] system in an amount to ensure that the fund is
at all times financially sound but in no event shall the
Municipality, nor the members, be required to contribute to the
system if the Board's actuary determines that the funds necessary
to pay the actuarial liability for the benefits for system members
contained herein are available from the total assets of the system.
(Additions are emphasized; deletions are bracketed.)
Anchorage Ordinance 94-95 also added a new section,
codified as AMC 03.85.210(D), which governs Plan III and states:
The Municipality of Anchorage, in addition to
the payroll deductions of members, shall contribute additional
monies to the system in an amount to assure that the fund is at all
times financially sound, but in no event shall the Municipality,
nor its members, be required to contribute to the system if the
Board's actuary determines that the funds to pay the actuarial
liability for benefits for system members contained herein are
available from the total assets of the system. In the event that
the Board's actuary determines that contributions are again
required to meet the actuarial liability for benefits, then current
employees who are members of Plan 3 of this system and the
Municipality shall make contributions in the ratio as set forth in
03.85.210(B).
In July 1994 MOA sent a memorandum to all APFRS members
explaining that the Anchorage Assembly had amended AMC 03.85 to
provide that "no employee or employer contributions to the Police
and Fire Retirement System would be required if the actuary for the
System determined that sufficient funds were available to pay the
actuarial liability for the benefits." The memorandum also stated
that the actuary for the APFRS had determined that the system "when
taken as a whole"was overfunded by "about"twenty million dollars.
It concluded by stating that as of the pay period ending July 24,
1994, there would be no more employer or employee contributions to
Plan III. Based on the actuarial soundness of Plans I and II, the
Board had suspended employee and employer contributions to those
plans before passage of AO 94-95. Although Plan III was only 89%
funded, and its projected liability exceeded its assets by
approximately $15,660,000, the 1994 amendments to the AMC allowed
MOA to suspend contributions to that plan, because the asset value
of the entire system as a whole was projected to be 104% or 102%
(depending on whether there were new Plan III entrants) of its
projected liability.
B. Proceedings
Six APFRS members sued MOA on behalf of "a class"
consisting of active and retired members of Plans I and II. [Fn. 4]
The second amended complaint pled various causes of action against
MOA, APFRS, and four unnamed APFRS Board members; it included
claims based on federal and state constitutional violations and
breach of contract. The class sought summary judgment on the
theory that funds were diverted from Plans I and II, thus violating
Alaska Constitution article XII, section 7 by impairing or
diminishing the APFRS's ability to enhance benefits for Plan I and
II members and by weakening the financial integrity of Plans I and
II.
The superior court granted the class summary judgment
against MOA, but denied summary judgment against the Board. A
judgment declared that AO 94-95 violated Alaska Constitution
article XII, section 7, and that AO 94-95 was null and void to the
extent it amended AMC 03.85.100(C). The superior court also
ordered that all funds "transferred from Plans I and II of the
[APFRS] be restored to those Plans."
MOA appeals the superior court's grant of summary
judgment, and asks that the trial court be instructed to enter
summary judgment for MOA. MOA and the class both appeal from the
court's award of full "actual"attorney's fees to the class.
III. DISCUSSION
A. The Constitutionality of AO 94-95
1. Constitutional standard
Alaska Constitution article XII, section 7 protects
"accrued benefits"of public employee retirement systems from
diminution or impairment. [Fn. 5]
In granting summary judgment to the class and finding AO
94-95 violated Alaska Constitution article XII, section 7, the
superior court held that the members of Plans I and II had a vested
interest in the surpluses generated by their plans. It reached
that conclusion given the historically distinct structure of the
plans, the lack of notice to members of Plans I and II that a
surplus would "essentially be donated"to subsidize contributions
to a successor plan covering "a distinct population of recent
hires,"and the APFRS Board's 1993 Statement of Investment Goal in
which each plan's respective membership could expect that "the
benefits flowing from the increasing strength of each plan would be
preserved for the benefit of the membership of that plan." The
court further noted that even though Board recommendations are only
advisory, it was "unlikely"the Assembly would ignore a
recommendation to increase benefits. The court also recognized
that "it cannot be denied that the retention of surplus assets
enhances the integrity of a plan, a condition clearly more
favorable to its members than the dilution effected by AO 94-95."
MOA argues that the accumulated surpluses in Plans I and
II gave the members of those plans no "accrued benefits,"because
the rights of plan members were determined when they enrolled, and
the plans did not entitle the members to any distribution of
accumulated surpluses. Instead, because Plans I and II were
defined benefit plans whose benefits were guaranteed by MOA if
employee contributions fell short, plan members could not
reasonably expect to receive any portion of any accumulated
surplus. MOA further argues that the superior court erred in
relying upon the 1993 APFRS Statement of Investment Policy, which
was not binding on MOA and created no rights beyond those specified
in AMC 03.85. MOA asserts that the superior court's ruling that
the class members had vested rights in "the surpluses generated by
their plans"and the related "possibility of increased benefits"is
inconsistent with the precedent established by this court. It
concludes that AO 94-95 does not diminish or impair any "accrued
benefit."
Hammond v. Hoffbeck, 627 P.2d 1052 (Alaska 1981), set out
a framework for analyzing a claim alleging a violation of article
XII, section 7 of the Alaska Constitution. [Fn. 6] In Hoffbeck, we
held that the right to benefits vests when the employee enrolls in
the retirement system, rather than when the employee is eligible to
receive the benefits. Id. at 1056-57. Changes in a system that
operate to an employee's disadvantage by diminishing or impairing
vested rights [Fn. 7] must be offset by comparable new advantages,
or the changes will run afoul of article XII, section 7. Id. at
1057 (citing Allen v. City of Long Beach, 287 P.2d 765, 767 (Cal.
1955)).
In Hoffbeck, amendments to the statutory scheme
underlying the Alaska Public Employees' Retirement System (PERS)
reduced members' occupational death and disability benefits, and
excluded some persons who were previously eligible for disability
benefits. Id. at 1053-54. We there held that the vested benefits
protected by article XII, section 7 include "not only the dollar
amount of the benefits payable, but the requirements for
eligibility [for benefits] as well." Id. at 1058.
We next considered article XII, section 7 in Sheffield v.
Alaska Public Employees' Ass'n, 732 P.2d 1083 (Alaska 1987). In
Sheffield, members of the PERS retirement system challenged the
PERS Board's adoption of new actuarial tables, which reduced the
benefits received by early retirees. Id. at 1084. In holding that
using the new actuarial tables violated the employees'
constitutional rights, we made it clear that the benefits in force
at the time of enrollment in the system will be protected, stating:
[A member] is entitled to have the level of
rights and benefits then in force preserved in substance in his
favor without any modification downwards. . . . When we speak of
the level of rights and benefits protected by [this statute] we
mean the practical effect of the whole complex of provisions . . .
.
Id. at 1087 (quoting Opinion of the Justices, 303 N.E.2d 320, 327
(Mass. 1973) (emphasis added)).
Citing the quoted language, the parties now before us
disagree over what constitutes the "practical effect of the whole
complex of provisions"regarding the APFRS. The class contends
that prior to AO 94-95 the practical effect of the whole complex of
provisions was "separate financial integrity"and "the prospect of
increased benefits to each plan's membership from its own surplus
generated from the investment of its own, separate, employer and
employee contributions." In support, the class relies upon (1) the
Board's 1993 investment goal of using income generated from
investments of the funds to "reduce contributions, increase
benefits or both"and (2) the "separateness"of the plans, i.e.,
their separate contribution rates, membership, and accounting.
MOA, however, asserts that under Sheffield, benefits are
defined as the "practical effect of the statutory provisions"in
force at the time of enrollment and do not encompass
"possibilities"that may exist. In support, MOA also cites Flisock
v. State, Division of Retirement and Benefits, 818 P.2d 640 (Alaska
1991); Rice v. Rice, 757 P.2d 60 (Alaska 1988); and State v. Allen,
625 P.2d 844 (Alaska 1981).
We held in Flisock that although an employee had the
right to the benefits provided by statute when he enrolled in his
retirement system, the employee had no vested right in the
Retirement Division's mistaken application of the statutory
provisions. 818 P.2d at 644 n.5. We held in Rice that the use of
a Qualified Domestic Relations Order (QDRO) to divide an employee
spouse's pension benefits simply changed the method of
distribution, and therefore did not impair vested rights because it
did not reduce the dollar amount of monthly pension benefits. 757
P.2d at 62.
The parties disagree about the effect of the discussion
of "vested rights"in State v. Allen, 625 P.2d at 847-48 & n.5
(quoting 3A A. Corbin, Corbin on Contracts sec. 626, at 10-11 (rev.
ed. 1960)). Allen upheld the right of those enrolled in the
Elected Public Officers' Retirement System (EPORS) to receive, upon
retirement, the benefits promised under the EPORS statute although
the statute was repealed by initiative only eight months after the
statute was implemented. Id. at 849. Quoting Corbin, we
distinguished between a "vested right"and an "expectancy":
[T]he existence of a "contract right"is not
denied merely because the money is payable in the future and only
on the happening of an uncertain event or because some one has a
power of termination or modification. If a right has to be
"vested"in order to be recognized and protected, these rights are
vested. It is immaterial whether the parties "expect"or "hope"
that payment will take place.
Id. at 847-48 n.5 (quoting Corbin, sec. 626, at 10-11).
Relying on Allen, MOA argues that the prospect of a
future increase of benefits is only an "expectancy"rather than a
vested right because no increase was ever promised. The class
argues that an enforceable promise can be for something other than
the payment of money; it asserts that the promise could be to
invest wisely the retirement assets with the understanding that the
proceeds, while presently undetermined, may only be used to benefit
those who made the initial investment.
These three cases reaffirm the principle espoused in
Hoffbeck, that an employee's right to retirement benefits vests
upon his or her enrollment in the retirement system. MOA argues
that under Alaska law, not all changes in a retirement system
unconstitutionally diminish "accrued benefits." We agree with that
general proposition, but it does not resolve the question presented
here. [Fn. 8]
2. Analysis
Our review of AMC 03.85 leads us to conclude that the
APFRS treated the plans (as they were successively adopted) as
distinct for all significant purposes. They had distinct
contribution requirements (which became less favorable to the
members of each newly added plan). [Fn. 9] They provided distinct
and different benefits to members of each plan. [Fn. 10] Further,
AMC 03.85.100(G) required an independent actuarial evaluation of
Plans I and II every two years. [Fn. 11] That provision cannot be
read to allow a calculation of actuarial soundness including
members of any other plan, including Plan III. A separate
provision, AMC 03.85.210(A), required an annual "actuarial
valuation of Plan III . . . to determine the contribution rate
required to maintain the actuarial integrity of Plan III."
Given these distinctions in contribution rates and
benefits, and the explicit requirement for a separate actuarial
evaluation for Plans I and II, it is not surprising that MOA and
APFRS treated the plans as separate except for purposes of
investing the assets: in the words of the consulting actuary, "The
System has historically been funded as three separate plans."
The separate treatment of plan funding confirms the
apparent scheme originally created by the enabling ordinance.
Nothing about the APFRS before 1994 would have alerted newly
enrolled plan members that their contributions might be used
prospectively or retrospectively to fund one of the other plans.
For example, had the investments for Plan I been extremely
unsuccessful, Plan III members would have had no reason to expect
when they enrolled that any surplus in Plan III might be used to
remedy any deficiency in Plan I. Anchorage Municipal Code
03.85.210(A), which requires "independent actuarial valuation of
Plan III . . . in order to determine the contribution rate required
to maintain the actuarial integrity of Plan III,"strongly implies
otherwise. [Fn. 12]
MOA argues that because these are defined benefit plans,
members have no right to share or reasonable expectation of sharing
in any surplus created by overcontributions or investment success.
The other side of that argument, however, is that before 1994, the
enabling code provisions gave MOA no right to divert accumulations
attributable to members of one plan for the benefit of members of
a different plan. Likewise, members would have had no reason to
think that the fruits of their own contributions might reduce the
contributions of members of a different plan. Instead, a contrary
expectation was reasonable: because the plans provided defined
benefits, MOA was obliged to pay any deficiency. That obligation
was inconsistent with requiring members of one plan to help remedy
a funding deficiency in another plan. Similarly, provisions for
separate valuations to calculate the contribution rates for each
plan to maintain "the actuarial integrity of Plan III,"AMC
03.85.210(A), and "Plans I and II as actuarially sound,"AMC
03.85.100(G), render the defined benefit feature inconclusive.
Consequently, whether or not members of Plans I and II
expected when they enrolled to share in any surplus by an increase
in benefits, they reasonably could have expected that the product
of their contributions would be used for their ultimate benefit.
Certainly they could not have expected that any surplus would be
used for the benefit of non-plan members.
To do what AO 94-95 would require would squarely conflict
with AMC 03.85.100(G) with respect to Plans I and II. It would
also implicitly conflict with the separation inherent in plans
which have different contribution rates, different benefits, and
different obligations. At the least, as the superior court
observed, maintaining the separation among the funds "enhances the
integrity of a plan, a condition clearly more favorable to its
members than the dilution effected by AO 94-95." Superior Court
Order at 15 n.14.
MOA asserts that the surpluses contained in Plans I and
II are excess to the needs of those plans. We note, however, that
the actuaries' 1994 responses to an APFRS inquiry about the impact
of combining the plans reveal that (depending upon assumptions
regarding additional enrollments, suspension of Plan III
contributions, and declines in investment returns) the funding for
the combined system was reduced to either 102% or 99%.
Consequently, combining the three plans clearly impaired the
inherent integrity of Plans I and II. MOA argues that its
obligation to guarantee the defined benefits makes any surplus
irrelevant. MOA might as well argue that it could have altogether
suspended its contributions, on the theory its probable future
solvency would have permitted it to guarantee benefits even if the
funds were not actuarially sound.
We conclude that AO 94-95 unconstitutionally impairs the
vested right of members of Plans I and II to have the actuarial
soundness of those plans evaluated and maintained separately
without being affected by the soundness of other plans. That
failure impairs the ability of Plans I and II to withstand future
contingencies, such as increases in plan obligations, declines in
investment revenue and inability by MOA to fund any shortfall. It
is therefore unconstitutional. Given that conclusion, we need not
also consider whether the Board's 1993 Statement of Investment
Policy gave rise to any rights which could be considered to have
vested and which were impaired or diminished by AO 94-95.
3. Cases from other jurisdictions
MOA, citing cases from other jurisdictions, asserts that
employees under a defined benefit pension plan have no
constitutional right to the surpluses in their plans; it argues
that the only vested right which cannot constitutionally be
diminished or impaired is the receipt of the statutorily defined
benefits. [Fn. 13] See Poggi v. City of New York, 491 N.Y.S.2d 331
(App. Div. 1985), aff'd, 492 N.E.2d 397 (N.Y. 1986) (upholding
constitutionality of supplemental benefits statute allowing certain
investment earnings of retirees' defined benefit plan to be
allocated as supplemental benefits because the statute did not
impair or diminish the level of benefits provided under the pension
statutes); Halsted v. City of Flint, 338 N.W.2d 903, 906 (Mich.
App. 1983) (upholding a supplemental benefits statute funded by the
pension plan's surplus and only for the benefit of certain
retirees, holding that "because there is no evidence that [the
ordinance] diminishes or impairs the full payment of plaintiffs'
accrued financial benefits, the ordinance does not violate the
constitutional proscription against impairment of contracts.").
MOA also relies on State ex rel. Dadisman v. Caperton,
413 S.E.2d 684 (W. Va. 1991). The West Virginia Retirement System
consisted of two retirement plans, one fully funded and the other
underfunded, within a single system. Id. at 686, 690. The monies
of both plans had been accounted for on a system-wide basis and
collectively invested. Id. at 690. A subsequently enacted statute
allowed the two plans to be actuarially valued as one system to
determine the amount of employer contributions required; this
allowed contributions to be suspended because the system as a whole
was actuarially sound although funds from the overfunded plan were
diverted to cover losses in the underfunded plan. Id. Members of
the overfunded plan alleged that the surplus in their plan belonged
to them, and could not be diverted to cover liabilities in the
other plan. Id. The court rejected this argument, finding that so
long as the system remained actuarially sound there was no
violation. Id.
Whether or not these cases are distinguishable, as the
class argues, [Fn. 14] we need not consider whether the class
members had a right to receive increased benefits or share in the
accumulated surplus, because we have held that AO 94-95 impairs the
vested right of members of Plans I and II to have actuarial
soundness of Plans I and II evaluated independently of any other
plan.
We are more persuaded by Valdes v. Cory, 189 Cal. Rptr.
212 (App. 1983), cited by the class in support of its argument that
members of Plans I and II had a vested interest. During a budget
crisis the California legislature passed emergency legislation that
allowed the state to suspend contributions to the public employees
retirement system. Id. at 216-17. Although the state's action had
not reduced employee benefits under the system, the court
determined that the state could not suspend or reduce its
statutorily defined contributions absent actuarial input to ensure
that the system would remain actuarially sound. Id. at 223. The
court stated that although an employee may not suffer out of pocket
expenses, "the interest of the employee at issue here is in the
security and integrity of the funds available to pay future
benefits." Id. at 222.
B. The Award of Attorney's Fees
Pursuant to Civil Rule 82(b)(1), the class sought an
attorney's fees award against MOA equal to 2% of the "judgment"or
"common fund."[Fn. 15] The class asserted that the judgment or
common fund equaled the amount, roughly $40 million, restored to
Plans I and II. The class also asked the court to award class
counsel compensation equal to the Rule 82 award plus an additional
6% of the common fund, for a total of 8% of the amount restored to
Plans I and II.
The superior court imposed a Rule 82(b)(2) award against
MOA for full hourly attorney's fees [Fn. 16] of $76,618.34 (the
product of counsel's hours and an hourly rate of $225). [Fn. 17]
The superior court declined to follow a common fund approach,
citing "the lack of money judgment and the difficulty in
determining the monetary value of the judgment." It also stated
that "it would be inappropriate to significantly diminish the
assets"of the plans to fund a fee award.
The class argues that the award undercompensated class
counsel and that it was error not to apply the Rule 82(b)(1)
schedule to the judgment or common fund and not to allow the class
to bear the litigation cost by awarding counsel 6% of the surplus
restored to the plans. The class's arguments depend in part on its
assertion that restoration of the surplus funds created a common
fund or money judgment. [Fn. 18] MOA argues that it was an abuse
of discretion to award the class full actual fees absent a finding
that MOA engaged in bad faith or vexatious conduct. The APFRS
Board argues that the class created no common fund and that no
award should be made from the APFRS assets.
Two main questions are presented. [Fn. 19] The first
relates to fee-sharing: What fees do class members owe class
counsel? The second relates to fee-shifting: What fees should the
class, as the prevailing party, recover from MOA under Rule 82?
Given our recent approval of a two-step process for calculating
attorney's fees in class actions, Municipality of Anchorage v.
Gentile, 922 P.2d 248, 263-64 (Alaska 1996), the answer to the
first question bears on the answer to the second.
1. Fees due class counsel
The class retained counsel under an agreement obliging it
to pay $5,000 for the initial consultation and analysis, up to
$25,000 in hourly fees at a rate of $75 per hour, and not more than
10% of any common fund recovered. If the total of the Rule 82
award and common fund fees was less than 10% of the common fund,
counsel would receive that total. If the total was more than 10%
of the common fund, the class would receive the excess. The
agreement did not squarely specify counsel's fees if there was a
Rule 82 award but no common fund; it appears the parties assumed
counsel would receive any Rule 82 fees awarded to the class, and up
to $30,000 from the class members whether or not the class
prevailed. When they asked the superior court to approve fees for
counsel, the class and its attorneys reasoned that a common fund
had been achieved, and that the agreement consequently governed
counsel's fees.
We have recently discussed the common fund doctrine.
Gentile, 922 P.2d at 265; Edwards v. Alaska Pulp Corp., 920 P.2d
751 (Alaska 1996). The doctrine is "implicated any time one
litigant's success releases well-defined benefits for a limited and
identifiable group of others." Edwards, 920 P.2d at 755.
Because Plans I and II are defined benefit plans, and
because the enabling ordinance did not require that any surplus be
paid out to members as increased benefits, members had no vested
right to receive increased distributions funded by the surplus. As
noted previously, the constitutional flaw in AO 94-95 is not that
it takes some particular amount from the surplus for Plans I and
II, but that it fails to respect the vested right of members of
Plans I and II to have the actuarial soundness of those plans
evaluated and maintained separately, without being affected by the
soundness of any other plan. The quantitative value of this
impairment cannot be directly measured by the amount of the
restored surplus, because the value of the impairment is
contingent. The record before us does not address the likelihood
of those contingencies and does not permit quantitative valuation
of the litigation benefit achieved.
Further, the common fund doctrine is based on the
principle of equitably spreading counsel's fees among the
benefitted class members. Gentile, 922 P.2d at 267. It is
impossible to calculate from the appellate record how the restored
surplus financially benefits individual members. The contingent
benefit may be more valuable to some members than others. (The
value might turn, for example, on the projected duration and value
of a member's benefits.) Absent any present right to share
directly in the surplus, valuing the benefit achieved for each
class member is difficult, if not impossible. Calculating the
amount of litigation expense each member should bear is equally
difficult.
To be distinguished is Gentile, where the class
successfully challenged a reduction of post-retirement medical
benefits and the superior court restored the benefits to their
previous level. Gentile, 922 P.2d at 252. Success in the instant
case did not alter the benefits which MOA must pay per the plans.
We conclude that counsel's success did not release "well-
defined benefits"constituting a common fund. The superior court
did not err in implicitly declining to award class counsel any part
of the surplus restored to the plans.
Citing Grein v. Cavano, 379 P.2d 209 (Wash. 1963), the
class appears to argue that the common benefit doctrine would
justify a fees award funded by restored plan assets. It thus
implicitly argues that references in the fee agreement to a "common
fund"also encompass a common benefit. The superior court's
findings dispose of this argument. In declining to follow a common
fund approach, the superior court noted the lack of a money
judgment and the difficulty in determining the value of the
judgment. It also found that it would be inappropriate to
"significantly diminish"the plans' assets to fund a fee award.
The superior court's observation about the difficulty of
determining the value of the judgment remains relevant and valid;
its conclusion that it would be inappropriate to diminish plan
assets to fund an award is not erroneous. That conclusion
controls, and dooms, a common benefit award funded by plan assets.
2. Rule 82 fees
This does not end our inquiry. In Gentile, we adopted a
two-step analysis for calculating the Rule 82 attorney's fees to be
awarded the prevailing party in class actions. The trial court
must "(1) determine the compensable value of the services the
attorneys rendered to the class, and (2) apply Rule 82 to the
amount calculated in Step 1 to decide how much [the non-prevailing
party] should pay." Gentile, 922 P.2d at 263. The compensable
value or actual fees are what the client has agreed to pay, and are
not necessarily limited to the product of an attorney's hourly rate
times the number of hours worked. Id. at 264. We also noted that
"where the attorney charges no fee or a lower than usual fee,
however, the proper approach is to value the attorney's services
and to make a Rule 82 award which is some fraction of this value.
Arctic Slope Native Ass'n v. Paul, 609 P.2d 32, 38 (Alaska 1980)."
Gentile, 922 P.2d at 263 n.20. In determining the compensable
value of class counsel's services, the court may consider such
factors as "the need to promote the efficient use of court
resources"through the use of class action litigation, and "the
potential difficulty of attracting capable counsel." Id. at 264.
We also held in Gentile that the absence of a traditional fund does
not preclude application of the common fund rationale in an
appropriate case, when evaluating the attorney's services during
Step 1. Id. at 266. We noted that counsel's fees might be
calculated by either a lodestar or percentage of fund approach.
Id. We recognized, however, that any difficulty in calculating the
value of the common benefit may make the percentage approach
"inappropriate." Id.
In this case, it is appropriate to use the two-step model
to calculate counsel's fees and the Rule 82 award. The fees the
class agreed to pay did not necessarily measure the fair value of
the services provided. Although the superior court made its award
before we decided Gentile, it calculated the value of counsel's
services as $76,618.34. Under the two-step Gentile methodology,
the superior court might then have calculated counsel's fees using
a lodestar approach. That method considers various factors [Fn.
20] and considers whether to award some multiple of the incurred
fees. That would have been an appropriate way to calculate the
value of counsel's services based on the market value of the hours
spent at a reasonable hourly rate.
It appears that the superior court has already calculated
the market value of counsel's services. Because a court might in
its discretion choose to apply a multiplier in such a case, it is
necessary to remand for consideration of the lodestar factors. On
remand the trial court can decide whether to apply a lodestar
multiplier, and, if so, the appropriate factor.
After the trial court calculates the value of counsel's
services in Step 1, it will be able to calculate the amount of fees
to be assessed against the losing party under Rule 82. Rule
82(b)(2) initially applies here because the class recovered no
money judgment. The presumed fee award is 20% of the fees
"incurred"(as calculated in Step 1), subject to deviation upon
consideration of the factors listed in Rule 82(b)(3).
The superior court chose to deviate from the 20% standard
to award full hourly fees. To some extent, the factors that led
the court to award full hourly fees may duplicate considerations
that will bear on any lodestar analysis. Because the gross value
of counsel's fees if the superior court applies a lodestar factor
on remand may differ from the value previously calculated by the
superior court, and because the superior court may wish to
reconsider the Rule 82(b)(3) factors given our recent adoption of
the two-step methodology in Gentile, it is also necessary to remand
for reconsideration of the Rule 82 award.
2. Full actual fees
MOA argues that full actual fees should not have been
granted because there was no finding that MOA litigated in bad
faith. The purpose of shifting attorney's fees under Civil Rule 82
to the non-prevailing party is to "compensate a prevailing party
partially, not fully, for attorney's fees incurred in litigation."
Demoski v. New, 737 P.2d 780, 788 (Alaska 1987).
The class, however, argues that full actual fees were
reasonable since class counsel would otherwise be seriously
undercompensated. The class asserts that Civil Rule 82 is designed
to compensate a prevailing party, but is not intended to compensate
a litigant's attorney, which in non-class action cases is a matter
resolved between the attorney and client in their fee agreement.
The class's counsel states that since the court must approve the
amount of fees counsel receives, and the awarded fees are counsel's
only source of compensation, MOA should be required to pay the
class's full fees or counsel will be undercompensated.
The issue of undercompensation in this case is properly
addressed in the Step 1 analysis. Once the fair value of counsel's
services to the class has been determined, the traditional Rule 82
analysis may be applied in Step 2. Because we remand for
reconsideration of fee issues in light of the two-step Gentile
methodology, and because the superior court on remand will be free
to reconsider the Rule 82(b)(3) factors, we need not now decide
whether it was error to award the class full hourly fees against
MOA, and whether class counsel was undercompensated.
4. Fees against APFRS
Because we conclude that the superior court did not err
in deciding that it was inappropriate to fund an award from plan
assets, we agree with APFRS's argument that no fees should be
awarded against the APFRS Board members or payable from APFRS
assets.
IV. CONCLUSION
We AFFIRM the superior court judgment that held that AO
94-95 violates article XII, section 7 of the Alaska Constitution.
We AFFIRM the denial of a fee award against APFRS. We REMAND the
remaining attorney's fees issues for further proceedings consistent
with this opinion.
FOOTNOTES
Footnote 1:
Unless specifically noted, the provisions of AMC 03.85 are the
same as when the pertinent events took place.
Footnote 2:
"System"is defined at AMC 03.85.015(R) as "the retirement
program described in this chapter, and may refer to Plans I and/or
II and/or III as defined in Section 03.85.020 depending upon the
context and the enrollment status of each particular member."
Footnote 3:
The actuary explained that "projected liability"represented
"the actuarial present value of all projected benefits to be paid
. . . based on assumptions of future experience that represents our
best estimate . . . ." The report further explained that "the
projections are inexact because they are based on assumptions which
are themselves necessarily inexact, even though we consider them
reasonable."
Footnote 4:
The Board filed a declaratory judgment action against the
class and MOA. The Board's action was consolidated with the action
brought by the class.
Footnote 5:
Article XII, section 7 of the Alaska Constitution states:
Membership in employee retirement systems of
the State or its political subdivisions shall constitute a
contractual relationship. Accrued benefits of these systems shall
not be diminished or impaired.
Footnote 6:
[Fn. 21]The constitutionality of a municipal ordinance is a
question of law on which we exercise our independent judgment.
Municipality of Anchorage v. Anchorage Police Dep't Employees
Ass'n, 839 P.2d 1080, 1083 n.7 (Alaska 1992). When possible, we
must "construe statutory provisions in such a way as to avoid
unconstitutionality rather than simply void them on the basis of an
interpretation which renders them constitutionally infirm."
Hammond v. Hoffbeck, 627 P.2d 1052, 1059 (Alaska 1981).
Footnote 7:
The phrase "accrued rights"in article XII, section 7 of the
Alaska Constitution is synonymous with "vested rights." Hoffbeck,
627 P.2d at 1055 n.4 (citing Bidwell v. Scheele, 355 P.2d 584, 586
(Alaska 1960)).
Footnote 8:
We deal here only with the constitutionality of AO 94-95. We
express no opinion about any of the other possible grounds for
relief.
Footnote 9:
For Plan I, a member's monthly contribution may not exceed 6%
of his or her gross monthly compensation. AMC 03.85.100(A). For
Plan II, a member's monthly contribution is based on an actuary's
evaluation of the percentage required to maintain the system as
actuarially sound. AMC 03.85.100(A), (G) & (H). For its first
year, the Plan II contribution rate was 6.89%. AMC 03.85.100(H).
Under Plan III, a member's maximum contribution rate is set by the
APFRS Retirement Board every five years, and the actual rate may be
reduced or increased at any time during that five year period so
long as the contribution requirement does not exceed the maximum
rate set. AMC 03.85.210(B). At inception, the Plan III
contribution rate was 12%. AMC 03.85.210(A).
Footnote 10:
Members of Plans I and II will receive 2.5% of their total
compensation during three consecutive calendar years of credited
service which yield the highest average monthly compensation
multiplied by the number of years they were plan members. AMC
03.85.110(A), AMC 03.85.015(A). Payments of these retirement
benefits are guaranteed for life. AMC 03.85.110(F). Apart from
the payroll deductions, MOA must "contribute additional monies to
the plan in an amount to assure that the fund is at all times
financially sound." AMC 03.85.100(C). Members of Plans I and II
are eligible for "voluntary normal"retirement benefits upon
completion of twenty years of total credited service. AMC
03.85.110(A). Members are also eligible for "voluntary early"
retirement benefits after attaining age fifty-five with a minimum
of five years of credited service. AMC 03.85.110(B).
Members of Plan III will receive 2.5% of their average
compensation during the last fifty-two biweekly pay periods, or any
two consecutive tax years, whichever results in the highest average
amount, multiplied by the number of years of credited service. AMC
03.85.200(J), AMC 03.85.220(H). Plan III members are eligible for
"normal service"retirement benefits after completing twenty years
of total credited service. AMC 03.85.220(A). Unlike members of
Plans I and II, Plan III members must complete at least fifteen
years of total credited service to become eligible for "early
service"retirement benefits. AMC 03.85.220(D).
Footnote 11:
AMC 03.85.100(G) provides:
An independent actuarial evaluation of Plans I
and II shall be made no less frequently than every two years. The
actuary shall determine the percentage of gross monthly
compensation required to maintain Plans I and II as actuarially
sound and shall report to the board the percentage attributable to
members and the percentage attributable to the Municipality of
Anchorage. The required percentage contributions shall reflect an
actuarially determined 2.5:1 municipality/ member contribution
ratio for members of Plan II.
Footnote 12:
See also AMC 03.85.210(B), which provides:
The member's maximum contribution rate shall
be fixed by the board once every five years. The board may reduce
or increase the contributions of both Anchorage and the member at
any time so long as that action does not unreasonably jeopardize
the actuarial integrity of the plan and so long as the member is
never required to contribute more than the maximum contribution
rate applicable at the time of such reduction or increase. At all
times, the contribution ratio of Anchorage to member shall be
maintained at a ratio of not less than 2.5:1. If additional monies
are necessary to assure that Plan III is financially sound at all
times and the member's contribution rate has already been set at
the maximum, then Anchorage shall be solely responsible for
contribution of such additional monies.
Footnote 13:
Under the federal Employee Retirement Income Security Act
(ERISA), codified at 29 U.S.C. sec.sec. 1001-1461 (1985), employees
are entitled to receive any surpluses generated by their pension
plans
when a plan is terminated unless the plan document provides for a
reversion of the excess assets to the employer. See 29 U.S.C. sec.
1344(d)(1) (Supp. 1997).
The plans at issue are not governed by ERISA because
ERISA exempts "governmental plans"from its coverage. See 29
U.S.C. sec. 1321(b)(2).
Footnote 14:
In Poggi, the pension statute expressly stated that the
pension benefits would not fluctuate with the fund's investment
earnings. Poggi v. City of New York, 491 N.Y.S.2d 331, 333 (App.
Div. 1985), aff'd, 492 N.E.2d 397 (N.Y. 1986). Dadisman was not
decided under a constitutional provision specifically addressed to
retirement benefits like article XII, section 7 of the Alaska
Constitution; Dadisman was decided under the contracts clause of
the West Virginia Constitution. State ex rel. Dadisman v.
Caperton, 413 S.E.2d 684, 686 (W. Va. 1991).
Footnote 15:
A prevailing party is normally entitled to an attorney's fees
award. Alaska R. Civ. P. 82(a). When a money judgment is
recovered, the award is calculated per a sliding schedule in Civil
Rule 82(b)(1), including 2% of that portion of a judgment over
$500,000 in a contested case resolved without trial.
Footnote 16:
MOA argues that the superior court awarded full "actual"
attorney's fees. The award did not precisely equal the fees the
class agreed to pay counsel, but were instead the full reasonable
fees calculated by the court on an hourly basis. We will refer
interchangeably to actual and hourly fees for the remainder of this
opinion.
Footnote 17:
Per Civil Rule 82(b)(2), when the prevailing party recovers no
money judgment in a case resolved without trial, the award is 20%
of the prevailing party's actual attorney's fees. After
considering factors listed in Civil Rule 82(b)(3), a trial court
may vary from the amounts awardable under Rule 82(b)(1) and (2).
As justification for not limiting the award to 20% of
actual fees per Rule 82(b)(2), the superior court considered the
following Rule 82(b)(3) factors: the use of the class action
procedure provided a substantial benefit to the plaintiffs who
might not otherwise have had access to the courts; the plaintiffs
litigated this matter efficiently and successfully which minimized
the fees incurred; a partial award would not achieve the policy
goal of providing a legitimate incentive for attorneys to represent
a class; there was significant litigation risk and plaintiffs had
difficulty retaining counsel; and the issues were unusually complex
and the significance of the relief obtained was great. See Alaska
R. Civ. P. 82(b)(3)(A)-(K).
Footnote 18:
Although the APFRS Board asserts that the class has
"effectively disclaimed"fees based on a "common benefit"theory,
we read the class's arguments regarding the common fund doctrine to
encompass a claim based on the value of benefits received by the
class.
Footnote 19:
We review a trial court's award of attorney's fees for an
abuse of discretion. Hughes v. Foster Wheeler Co., 932 P.2d 784,
793 (Alaska 1997).
Footnote 20:
Courts using the lodestar approach have either used a simple
lodestar formula, see Lindy Bros. Builders, Inc. v. American
Radiator & Standard Sanitary Corp., 487 F.2d 161, 166-68 (3d Cir.
1973), aff'd in part and vacated in part, 540 F.2d 102, 112-18 (3d
Cir. 1976), or hybrid or "blended"lodestar approaches examining
several factors when determining the multiplier to be used, see In
re Washington Public Power Supply System Security Litigation, 19
F.3d 1291, 1294-95 & n.2 (9th Cir. 1994).
In Edwards we noted the existence of different lodestar
tests. 920 P.2d at 757. It is premature for us to decide which
standard should apply here. We prefer to review this question in
the context of an appeal in which the trial court has actually
conducted an analysis of the lodestar factors as part of the
dispute before it.
Footnote 21:
Article XII, section 7 of the Alaska Constitution states:
Membership in employee retirement systems of
the State or its political subdivisions shall
constitute a contractual relationship. Accrued benefits of these
systems shall not be diminished or impaired.
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