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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Board of Trustees, Anchorage Police and Fire Retirement System v. Municipality of Anchorage (09/29/2006) sp-6056
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, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
| BOARD OF TRUSTEES, | ) | |
| ANCHORAGE POLICE AND | ) Supreme Court No. S- 11893 | |
| FIRE RETIREMENT SYSTEM, | ) | |
| ) Superior Court No. 3AN-03-10273 CI Appellant, | ) | |
| ) | ||
| v. | ) O P I N I O N | |
| ) | ||
| MUNICIPALITY OF ANCHORAGE, | ) No. 6056 - September 29, 2006 | |
| ) | ||
| Appellee. | ) | |
| ) | ||
)
MUNICIPALITY OF ANCHORAGE, )
) Supreme Court No. S-11922
Appellant, )
) Superior Court No. 3AN-03-
04760 CI
v. )
)
BOARD OF TRUSTEES, )
ANCHORAGE POLICE AND )
FIRE RETIREMENT SYSTEM, )
)
Appellee. )
)
Appeal in File No. S-11893 from the Superior
Court of the State of Alaska, Third Judicial
District, Anchorage, Morgan Christen, Judge.
Appeal in File No. S-11922 from the Superior
Court of the State of Alaska, Third Judicial
District, Anchorage, Dan A. Hensley, Judge.
Appearances: Douglas J. Serdahely, Patton
Boggs LLP, Anchorage, and Robert D. Klausner,
Klausner & Kaufman, P.A., Plantation,
Florida, for Appellant and Appellee Board of
Trustees. James D. Gilmore, Gilmore and
Doherty, P.C., Anchorage, for Appellee and
Appellant Municipality of Anchorage.
Before: Bryner, Chief Justice, Matthews,
Eastaugh, Fabe, and Carpeneti, Justices.
FABE, Justice.
I. INTRODUCTION
In these consolidated appeals, we address the question
whether the Municipality of Anchorage is required to compensate
the Anchorage Police and Fire Retirement System (APFRS System or
System) for any resulting adverse actuarial impact on the System
when the Municipality of Anchorage settles a grievance. Under
different factual scenarios, this question was litigated before
two different superior court judges, with each reaching a
different result. One superior court judge determined that
chapter 3.85 of the Anchorage Municipal Code contemplates
absorption by the System of the impact of grievances. Therefore,
any resulting actuarial liability from grievances is not an
unconstitutional change to the Retirement Plan, and the
Municipality does not have to compensate the System for the
impact. The other superior court judge determined that requiring
the System to absorb the impact of the actuarial liability
violates article XII, section 7 of the Alaska Constitution.
Because we believe that under the language of chapter 3.85 and
the policies adopted by the Board of Trustees of the System, the
impact of the grievances does not implicate article XII, section
7 of the Alaska Constitution, we conclude that, under the facts
of the cases before us, the Municipality of Anchorage is not
required to compensate the System for the actuarial impact of the
settlement of the grievances.
II. FACTS AND PROCEEDINGS
A. The APFRS System
The Municipality of Anchorage has maintained a defined
benefit retirement system since 1968 called the Anchorage Police
and Fire Retirement System, which was created to provide
disability, retirement, and death benefits to the Municipalitys
police and fire department employees.1 There are three distinct
plans within APFRS, and members belong to either Plan I, II, or
III, depending on their date of hire.
By the 1990s, Plans I and II had accumulated surplus
assets, and a lawsuit, hereinafter referred to as Gallion II,2
was filed by members of Plans I and II claiming the right to the
surplus assets. The parties entered into a conditional
settlement agreement, whereby it was agreed that [a]ll
beneficial, residual and reversionary interests in the trust
assets, including any surpluses, belong to the members and not to
the Municipality. It was further agreed that the Systems Board
of Trustees (Board) would recommend to the Anchorage Assembly
that it repeal the existing Plan under chapter 3.85 and adopt a
new ordinance and Plan. Under the conditional settlement
agreement,3 a distribution plan for the existing surplus assets
was made. It was further recommended that a sixteen percent
contingency be set aside to protect from market and actuarial
fluctuations. With regard to future surplus assets in excess of
the sixteen percent contingency, the agreement provided that
75% may be used for future benefit
enhancements and the remaining 25% of such
surplus shall be retained as a separate
contingency reserve. Any such benefit
enhancements must be approved by a simple
majority of the new Board[.]
A Notice of Proposed Settlement was sent to all members
of Plans I, II, and III, which outlined the terms of the proposed
settlement and noted that the settlement provides for the
possibility of additional future benefit increases. Subject to
conditions set forth by the Ordinance, future surpluses above the
16% contingency reserve (plus an additional contingency reserve
to be established from future surpluses) may be used for future
benefit increases without further Assembly approval. The
Municipality adopted the recommendations set forth in the
conditional settlement agreement and revised chapter 3.85.
Relevant portions of revised chapter 3.85 are set forth below.
The revisions of significance to this appeal are summarized
below:
System Purpose
Anchorage Municipal Code 3.85.010 sets forth the
purpose of the revised Plan, stating in relevant part that [a]ll
rights under the prior plan are carried forward without
interruption. This system is intended to be a contractual
relationship in accordance with the provisions of Article XII,
Section 7, of the Constitution of Alaska.
Relevant Definitions
Anchorage Municipal Code 3.85.015 contains a number of
definitions, including AMC 3.85.015(F), which defines average
monthly compensation for Plan I and II members as
compensation paid by the Municipality during
the period of the three consecutive calendar
years which yielded the highest income
divided by the number of months for which
such compensation was received. This can
also be calculated by utilizing the two full
calendar years preceding retirement, plus at
least the month of January of the third and
final year if that produces a higher monthly
average.
Under AMC 3.85.015(L), compensation for Plan I and
Plan II members is defined to include overtime, but overtime is
not included as compensation for Plan III members. Anchorage
Municipal Code 3.85.015(U) defines an enhanced benefit as a
benefit created from time to time from available surplus assets.
Under AMC 3.85.015(OOO), vested benefit means an immediate or
deferred benefit to which a member has gained a non-forfeitable
right under the provisions of [chapter 3.85].
Authority of the Board of Trustees
Under AMC 3.85.020(A), the sole and exclusive
administration of the retirement system is vested in the Board of
Trustees and [t]he board shall administer the system as set forth
in this chapter and shall be the final authority in all matters
pertaining to the application, interpretation and administration
of the provisions of [chapter 3.85].
Under AMC 3.85.020(G), the Board has the authority to
take such action as it deems necessary to carry out the
provisions of the chapter. All decisions of the board of
trustees made in good faith shall be final, binding and
conclusive on all parties, consistent with the provisions of
[chapter 3.85].
Retroactive Compensation
Retirement benefits for members of Plans I and II are
calculated at the rate of 2.5% of average monthly compensation
multiplied by the years of credited service under AMC 3.85.065.
Retroactive compensation . . . shall be considered by the board
in the calculation of benefits if paid as a result of a
grievance, arbitration award, collective bargaining agreement or
court ordered judgment or settlement. However, any amounts
awarded or paid as court costs, interest, attorneys fees,
statutory penalties, punitive damages and any other type[s] of
retroactive compensation that does not meet the definition of
compensation . . . shall be specifically excluded.
Under AMC 3.85.050(C), [a]ctive members may elect to
have retroactive pay treated as compensation in the year in which
paid or to have retroactive pay allocated to the pay periods
where it would have been actually paid.
Required Contributions of the Municipality
Anchorage Municipal Code 3.85.055(A) provides that
[n]otwithstanding the provisions of subparagraph E below, the
municipality shall make contributions on an actuarially
determined basis generally on a municipality/member ratio of 2.5
to 1. Subparagraph E provides that [t]he municipality, in
addition to the payroll deductions of members, shall contribute
additional monies to the system in an amount to ensure that the
system is at all times financially sound.
Anchorage Municipal Code 3.85.055(J) provides, [a]s of
the effective date of this chapter, Plans I and II are in a
surplus funded status. Resumption of contributions to Plans I
and II shall not be required unless, as determined and required
by the actuary for the system, the funded status of the plan
falls below 100 percent funding; nor shall contributions be
continued after 100 percent funding is again achieved.
Reserve Funding and Enhanced Benefits
The Board is required under AMC 3.85.155 to maintain a
contingency reserve at all times for funding of the minimum
defined benefits at not less than sixteen percent of accrued and
projected future liabilities. Surplus assets are reserved for
the exclusive benefit of the members and beneficiaries of the
System and surpluses belong to the members under 3.85.155(B).
Under AMC 3.85.155(D), if the Plan has 116% funding,
the Board has the authority to approve the payment of enhanced
benefits from the surplus assets with a value not to exceed
seventy-five percent of the available surplus assets, with the
remaining twenty-five percent held as additional reserve funding.
Anchorage Municipal Code 3.85.155(D) further provides that [t]he
form of any enhancement shall be determined in the sole
discretion of the board.
Anchorage Municipal Code 3.85.155(G) states that [n]o
member or beneficiary shall have a contractual right as to the
timing of a distribution of enhanced benefits authorized by the
board nor to receive a particular form of enhancement benefit,
except as provided in this section. And AMC 3.85.155(H) provides
that [a]ll enhanced benefits shall be funded solely from surplus
assets and shall not be the actuarial or financial responsibility
of the municipality.
On December 7, 2000, the Board adopted a new Policy
2000-4 to establish the Boards policy with regard to the
application of retroactive compensation payments to members of
the System following the reestablishment of the Plan. Under
Policy 2000-4, retroactive compensation is again defined in
relevant part as pay resulting from grievances, arbitration
awards, collective bargaining agreements, or court ordered
judgments, but excluding any amounts awarded or paid for court
costs, interest, attorneys fees, statutory penalties or punitive
damages[.] While for retired or deferred vested members
retroactive compensation is allocated to the pay periods where it
would have actually been earned, active members may either
allocate retroactive compensation to a single pay period or
allocate it to the periods where it would have been earned. Late
payment of overtime is allocated to the pay period where it is
paid rather than where it is earned. Policy 2000-4 provides that
[i]f eligible retroactive compensation alters the compensation
component of any benefit calculation (such as the need to use
different high years or different pay periods), then the benefit
will be recalculated to use the higher value.
B. The Stillman Litigation
Police Officer Gereth Stillman was terminated by the
Municipality in September 1998. Through the police union, he
filed a grievance, which was denied by the Municipality and was
then referred to arbitration. On August 1, 2000, the arbitrator
ruled that Stillman be reinstated with back pay and benefits for
the two-year period after his termination. The estimated
actuarial present value of the difference in Stillmans
compensation due to the retroactive compensation was $604,654 as
of February 1, 2003.
On August 12, 2003, the Board of Trustees filed a
complaint for damages against the Municipality, alleging that it
did not allow the Board to participate in discussions regarding
Stillmans restitution in a manner that would reduce the awards
impact on the Systems liabilities.4 The complaint alleged that
recognizing Stillmans award in 2001 created a substantially
greater liability to the System than would have been created if
the award had been made in 2000. It sought compensation from the
Municipality of the $604,654 impact on the System. Both parties
filed motions for summary judgment.
On March 11, 2005, Superior Court Judge Dan A. Hensley
issued a decision denying the Boards motion for summary judgment
and granting the Municipalitys motion for summary judgment.
Judge Hensley noted that the adverse employment action that
triggered the increased actuarial liability was not directed at
the pension plan. Judge Hensley further reasoned that the
increased actuarial risk was only incidental to that action and
that the pension plan recognized that employment litigation might
occasionally result in increased actuarial liability. Therefore,
he concluded that the risk of increased liability is an inherent
part of the System, that the Municipalitys settling of the
grievance was not an unconstitutional change to the Plan, and
that the Municipality did not have to compensate the System for
that liability. The Board filed a motion for reconsideration,
which was denied on March 21, 2005. The Board appeals.
C. The 4-10 Litigation
In 1994 the Municipality changed the work schedule of
patrol officers from four 10-hour shifts per week to five 8-hour
shifts per week. This resulted in a grievance known as the 4-10
grievance or litigation. An arbitrator determined in 1998 that
the Municipality violated its collective bargaining agreement by
unilaterally changing the work week of patrol officers without
first bargaining with the Anchorage Police Department Employees
Association. This decision was appealed. Although the 4-10
grievance was still pending when the conditional settlement
agreement was reached, and the settlement agreement resolved
other disputes, there was no resolution of the 4-10 litigation in
the conditional settlement agreement.
In early 2001, during the pendency of the appeal, the
Municipality reached a settlement with the Anchorage Police
Department Employees Association by which the Municipality agreed
to pay back wages in the form of overtime to certain police
officers in the amount of approximately $4 million. The Board
was not a party to the 4-10 litigation. Because overtime is
included within the definition of compensation for members of
Plans I and II, the $4 million paid to the police officers to
settle the 4-10 litigation was factored into their compensation
and therefore into their calculation of benefits. This resulted
in an increased cost and projected liability to the System. The
actuarial impact on the System of the 4-10 litigation was
$577,406.
On April 3, 2002, the Board demanded by letter that the
Municipality pay the impact of the 4-10 liability. The
Municipality did not respond in writing. On February 18, 2003,
the Board filed a complaint against the Municipality, seeking
compensation from the Municipality for the $577,406 liability
resulting from the settlement.5 It relied upon AMC 3.85.055(E),
which states that the Municipality shall contribute additional
monies to the system in an amount to ensure that the system is at
all times financially sound.
A non-jury trial was held on January 5 and 6, 2005. On
March 9, 2005, Superior Court Judge Morgan Christen issued
findings of fact and conclusions of law, determining that
requiring the System to absorb the cost of the actuarial impact
of the 4-10 liability violates Article XII, Section 7 of the
Alaska Constitution. Judge Christen reasoned that [t]he 4-10
impact on the System was not merely a delay in projected
compensation; it was an unanticipated increase in total
compensation paid to a subset of officers due to the
[Municipalitys] unforeseeable breach of the collective bargaining
agreement. Judge Christen distinguished the 4-10 litigation from
other factors that could result in the Systems funding falling
below 100% (such as poor market performance of the Systems
invested assets) because the 4-10 litigation, unlike the other
factors, was created by the Municipalitys wrongful breach of its
labor contract. Judge Christen then concluded that the Boards
policy does not require that the System absorb the actuarial
impact of retroactive compensation awards that are caused by [the
Muncipality] breaching a collective bargaining agreement.
Judge Christen determined that requiring the System to
absorb the actuarial impact of the 4-10 settlement was
unconstitutional because it increases the Systems costs and
impairs the ability of the System to withstand future
contingencies, hastens the day when plan members might have to
pay future contributions, and reduces the ability of members to
receive surplus benefits. She also concluded that, for those
members of the Plan who were not a part of the 4-10 litigation,
payment of the grievance constituted an impact on the system
without a corresponding benefit. Finally, Judge Christen noted
that payment of $577,406 is more significant in an actuarially
funded system than in a pay-as-you-go system because it impacts
the ability of the accrued fund assets to generate income. The
Municipality appeals.
Because the appeals raise substantially similar legal
issues, they have been consolidated.
III. DISCUSSION
A. Standard of Review
Constitutional issues and statutory interpretation
present questions of law and they are reviewed de novo.6 We
review grants of summary judgment de novo and will affirm if
there are no genuine issues of material fact and if the moving
party is entitled to judgment as a matter of law.7 We exercise
our independent judgment when deciding questions of law and adopt
the rule of law that is most persuasive in light of precedent,
reason, and policy.8
B. Judge Hensleys Decision Comports with Chapter 3.85.
1. Increased actuarial liability from the settlement
of grievances is inherent in the system.
Anchorage Municipal Code 3.85.050(B) contemplates the
payment of retroactive compensation in the event of a grievance
when it states, [r]etroactive compensation . . . shall be
considered by the board in the calculation of benefits if paid as
a result of a grievance, arbitration award, collective bargaining
agreement, or court ordered judgment or settlement. (Emphasis
added.) Similarly, Policy 2000-4 defines retroactive
compensation as pay resulting from grievances, arbitration
awards, collective bargaining agreements, or court ordered
judgments or settlements. (Emphasis added.) Furthermore,
Policy 2000-4 allows the recipient of a grievance award to add
the retroactive compensation to any year in which it is earned,
and to thereby receive higher benefits at an increased cost to
the System.
Judge Hensley noted that the Plan accounted for
employment litigation occasionally resulting in increased
actuarial liability. Therefore, he concluded that the risk of
increased liability is an inherent part of the System, that the
Municipalitys settlement of the grievance was not an
unconstitutional change to the Plan, and that the Municipality
did not have to compensate the System for the liability resulting
from the settlement of the grievance. Judge Hensley reasoned
that the decision to settle a grievance is akin to any employment
decision which results in the increase of liabilities to the
System, like the decision to authorize overtime and provide pay
raises.
Seeking reversal, the Board argues:
The result of the Stillman grievance is that
Stillman received a substantial sum, backpay
award based on a resolution between the
[Municipality] and the [Anchorage Police
Department Employees Association] concerning
Stillmans grievance arbitration proceedings.
Because this substantial backpay award
appeared in a single years paycheck, it had
the effect of unexpectedly increasing
Stillmans compensation. As pension benefits
are based on a percentage of compensation,
this resulted in the $604,654 increase in the
accrued liabilities of Plan II.
The net effect of the Stillman case is that
the [Municipality] reached an agreement in a
lawsuit with a third party that left the
Retirement System with the bill. The assets
of the System, reserved for all participants,
firefighters, other police officers, widows,
widowers, and orphans in Plan II, have been
misdirected to pay the Municipalitys debt on
behalf of Stillman. This is precisely the
misallocation of assets and diminution of
benefits disapproved by this Court in
[Municipality of Anchorage v. Gallion, 944
P.2d 436 (Alaska 1997) (Gallion I)].
The result of the grievance to which the Board objects, though,
is a product of its own Policy 2000-4, which allows active
members to allocate retroactive compensation to a single pay
period and expressly provides that [i]f eligible retroactive
compensation alters the compensation component of any benefit
calculation (such as the need to use different high years or
different pay periods), then the benefit will be recalculated to
use the higher value. Rather than being misdirected, Stillmans
retroactive compensation was calculated just as contemplated by
the Plan.
The Board also misapprehends Gallion I when it
characterizes the net effect of the Stillman grievance as
precisely the misallocation of assets and diminution of benefits
disapproved by this Court in Gallion I. In Gallion I, we
considered the constitutionality of an ordinance that would have
permitted the Municipality to make payments out of excess funds
in Plans I and II to ensure that Plan III was financially sound.9
We recognized that chapter 3.85 had treated the plans as separate
since their inception, with distinct members and benefits.10
Also, under AMC 3.85.100(G), an independent actuarial evaluation
was required every two years for Plans I and II.11 We determined
that [n]othing 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.12 We also noted that plan members 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.13
The Municipality distinguishes Gallion I, arguing that
in the present case, members and the Municipality have known from
the inception of the Plans that the payment of grievance awards
would be treated as compensation, and that contributions would
not be required from the Municipality unless the funded status of
the system were to fall below 100%. It reasonably notes that
Gallion I would have been a different case if, from the
inception, members of the Plans had been notified that surplus
assets in each of their plans would be averaged with the
surpluses in other plans to determine whether contributions were
necessary.
Judge Hensleys conclusion that the increased liability
stemming from the Stillman grievance was inherent in the System
is therefore amply supported by the plain language of the Plan
and Policy 2000-4, and our holding in Gallion I does not dissuade
us from affirming.14
2. That the Board was not a party to the Stillman
grievance does not change the result.
The Board was not a party to the Stillman litigation,
and therefore contends that it was error for Judge Hensley to
reject its argument that it should not be bound to absorb the
actuarial impact from the grievance. Relying upon the Seventh
Circuits decision in United States v. City of Chicago,15 the Board
argues that the Municipality may not impose obligations on the
Board that the Municipality incurred in litigation with Stillman.
But as the Municipality notes, City of Chicago is
distinguishable. In City of Chicago, the litigants agreed upon a
consent decree to which the board of a pension plan was not a
party. The consent decree required the pension plan to accord
seniority status to police officers who had been discriminated
against. However, the contributions made on behalf of the
officers under the consent decree did not equal those required by
the plan for full seniority status to be granted.16 Since
statutory language supported the boards position that it was not
the policy of the plan to award seniority status under those
conditions, the court ordered that the consent decree be
modified.17 Here, the increase in actuarial liability resulting
from the Stillman grievance is consistent with, rather than
contrary to, the terms of the Plan, and City of Chicago therefore
offers no support for the Boards argument.
As the Board notes, Alaska courts recognize that
parties to litigation may not bind or affect the rights of non-
parties.18 But the Board is essentially only being asked to
absorb the actuarial liability that was incurred through normal
operation of Policy 2000-4, and not to alter its policy in order
to accommodate unrelated liabilities imposed by a third party.
As the Municipality argues, the Board in fact agreed to the
imposition of the Stillman obligation because the contract
between the parties, memorialized at AMC 3.85.050(B), sets forth
the procedure for accounting for retroactive compensation in the
event of a grievance. Therefore, it was not error for Judge
Hensley to reject the Boards argument that it should not have to
absorb the liability because it was not a party to the
litigation.
3. Judge Hensley did not inappropriately substitute
his judgment for that of the Board.
Ordinarily this court uses its independent judgment on
questions of law unless the issue[s] involve[] agency expertise
or the determination of fundamental policy questions on subjects
committed to the agency.19 If the issue involves agency expertise
or fundamental policy questions, we review under the reasonable
basis standard and defer to the agency if its interpretation is
reasonable.20
The Board asserts that by virtue of the language of AMC
3.85.020(A), it is the final authority in all matters pertaining
to the application, interpretation and administration of the
provisions of [chapter 3.85]. It therefore claims that its
decision that additional contributions by the Municipality were
necessary in order to ensure that the system was financially
sound should have been binding on the Municipality, as AMC
3.85.055(E) provides that [t]he municipality, in addition to the
payroll deductions of members, shall contribute additional monies
to the system in an amount to ensure that the system is at all
times financially sound. The Board further argues that its
determination that the Municipality was required to make an
additional contribution was an exercise of its power to determine
actuarial standards and should have been accorded deference.
The Municipality counters that, even though the Board
is the sole and exclusive administrator of the System, it cannot
unilaterally change the terms of the contract between the
Municipality and the System. It contends that, since this is an
issue of statutory interpretation, this court should use its
independent judgment and not defer to the Board. Interpreting
the ordinance and using contract principles, the Municipality
maintains that there are no provisions of chapter 3.85 requiring
that the Municipality pay for the grievance, and there is no
evidence that the expertise of the Board was even used in
determining that the Muncipality should pay for the impact of the
Stillman grievance. The term financially sound is not
defined by the statute, and therefore an argument can be made
that the Board has been granted the authority to flesh it out.
But AMC 3.85.055(J) provides, [a]s of the effective date of this
chapter, Plans I and II are in a surplus funded status.
Resumption of contributions to Plans I and II shall not be
required unless, as determined and required by the actuary for
the system, the funded status of the plan falls below 100 percent
funding; nor shall contributions be continued after 100 percent
funding is again achieved. Even if we determined that the Board
had the discretion to determine when additional payments to the
system were required to maintain the System as financially sound,
the other provisions of chapter 3.85 demonstrate that the parties
understood the System to be financially sound when the System was
fully funded and not when all members were receiving enhanced
benefits. Even under a deferential standard, then, the Boards
interpretation would not be reasonable. We agree with the
Municipality that if the parties intended the Municipality to
have an express obligation to make payments in support of a given
level of surplus, it would have expressly so provided as it did
with minimum levels of funding. We also concur that it would be
rewriting the ordinance to impose such an obligation in the name
of discretion.
4. The unpredictable costs of litigation do not
warrant distinct treatment from actuarially
predictable costs.
The Board asserts that its determination to treat the
unpredictable effects of litigation differently from costs which
can be reasonably predicted according to sound actuarial
practices is a fundamental policy decision and that it seems
reasonable that the Municipality should be expected to pay for
[the] unpredictable yet very real adverse impact [of litigation]
on the Retirement System. It urges us to adopt Judge Christens
conclusion that the impact of the 4-10 liability can be
distinguished from other variables impacting the Systems costs
because this impact was within the [Municipalitys] control. It
was created by the Municipalitys wrongful breach of its labor
contract. The Municipality, on the other hand, argues that
retroactive compensation should be treated like all other
compensation and its unpredictability is irrelevant to its
constitutionality.
The plain language of AMC 3.85 and Policy 2000-4
supports Judge Hensleys interpretation that the risk of increased
actuarial liability from litigation is inherent in the System.
There are express provisions for the calculation of retroactive
compensation stemming from grievances, arbitration awards,
collective bargaining agreements, or court-ordered judgments, all
of which could arise from either a determination that the
Municipality was in some way at fault or from a settlement that
mooted the issue of fault. The System by its terms therefore
does not contemplate treatment of grievances differently when the
Municipality is at fault or simply because litigation might be
actuarially unpredictable. Additionally, the concerns with fault
raised by Judge Christen are mitigated by the exclusion of
statutory penalties or punitive damages from the calculation of
retroactive compensation under Policy 2000-4.
C. Requiring the System To Absorb Liability for Grievances
Does Not Raise Constitutional Concerns Under Article
XII, Section 7.
Under article XII, section 7 of the Alaska
Constitution:
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.
Judge Christen ruled that requiring the System to absorb the
actuarial impact of the 4-10 grievance was an unconstitutional
impairment of accrued benefits in part because it increases the
Systems costs and impairs the ability of the System to withstand
future contingencies, hastens the day when plan members might
have to pay future contributions, and reduces the ability of
members to receive surplus benefits.
It is undisputed that the System is currently fully
funded, and that the impact of the grievance awards did not
result in impairment of benefits to be distributed in the
ordinary course. What the grievance awards did do was increase
the Systems costs and impact the ability of members to receive
surplus benefits. In essence, Judge Christen and the Board
characterize the actuarial loss resulting from the settlement of
grievances as an impact on the System that has the effect of
impairing or diminishing the members rights. But even if the
actuarial loss had an impact, it does not follow that this impact
constitutes a change to the System or an impairment of vested
rights.
1. There was no change.
We interpret the concept of change broadly when
considering whether changes to a benefit plan unconstitutionally
diminish or impair accrued benefits. In Sheffield v. Alaska
Public Employees Association, Inc., we faced a change to the
actuarial tables used to calculate early retirement benefits that
resulted in lower monthly benefits than members would have
received under the earlier actuarial tables.21 We made clear that
it was the impact of any modifications to benefit plans, and not
their form, that was dispositive when assessing whether a change
was made and if so whether it was constitutionally infirm.22 We
held:
Even though the statutory terms embodying the
employees contracts remained unchanged, the
effect on the individual employee is the same
as if the statute had previously promised a
specific dollar amount in benefits and that
amount was reduced through the amendment
process. . . . [T]he form of the change
should be disregarded in favor of its impact.
As stated by the Massachusetts Supreme
Judicial Court in interpreting that states
law protecting employees contractual rights
to retirement benefits:
The minimal meaning . . . is that the
contract is formed when a person becomes
a member by entering the employment, and
he 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 not
excluding the [employees contributions],
for an increase in the [rate thereof] is
little different from a diminution of
the allowance.[23]
But, as Judge Hensley concluded, allowing the System to
absorb losses from grievances did not change the basic operations
of the System, even though it increased the Plans actuarial
liability. In form, then, it was not a change to the System. It
was clear, even prior to the 2000 restatement of the System, that
grievances could result in retroactive compensation. And this
retroactive compensation could have adverse actuarial liability
for the System and could impact the availability of assets to
withstand future contingencies through plan obligations, declines
in investment revenue, and inability to fund any shortfalls.
Therefore, it was the routine functioning of the System that
resulted in the loss.
2. There was no impairment to a vested right.
While it is undisputed that there was an impact on the
System, the question is whether the practical effect of the whole
complex of provisions impaired a vested right. The language of
chapter 3.85 shows that enhanced benefits are not vested rights.
Under AMC 3.85.015(OOO), vested benefit means an immediate or
deferred benefit to which a member has gained a non-forfeitable
right under the provisions of this chapter. Under AMC 3.85.010,
it is specifically stated that [t]his system is intended to be a
contractual relationship in accordance with the provisions of
Article XII, Section 7 of the Constitution of Alaska. But with
respect to enhanced benefits, AMC 3.85.155(G) provides that [n]o
member or beneficiary shall have a contractual right as to the
timing of a distribution of enhanced benefits authorized by the
board nor to receive a particular form of enhancement benefit,
except as provided in this section.
Other provisions of chapter 3.85 further support the
contingent nature of enhanced benefits. Anchorage Municipal Code
3.85.015(U) defines an enhanced benefit as a benefit created from
time to time from available surplus assets. Under
AMC 3.85.155(D), if the Plan has 116% funding, the Board has the
authority to approve the payment of enhanced benefits from the
surplus assets, but [t]he form of any enhancement shall be
determined in the sole discretion of the board. And
AMC 3.85.155(H) provides that [a]ll enhanced benefits shall be
funded solely from surplus assets and shall not be the actuarial
or financial responsibility of the municipality. This combined
language demonstrates that enhanced benefits are not vested.
The Board argues that the retirement benefits which
Judge Christen correctly protected in this case are the surplus
benefits which members of the System bought at the conclusion of
the litigation in Gallion for $40 million. But as the
Municipality responds, what the System bought was a contingent
right, not a vested right, to receive enhanced benefits if there
was a surplus in the System and the Board exercised its
discretion to grant one. Through normal operation of the System,
there was a reduction in available assets, but this did not
impair a vested right because [n]o member or beneficiary shall
have a contractual right as to the timing of a distribution of
enhanced benefits authorized by the board nor to receive a
particular form of enhancement benefit.
3. Payment of the grievance did not constitute an
impact on the System without a corresponding
benefit for members of the System who were not
part of the 4-10 litigation.
In Hammond v. Hoffbeck, we held that the fact that
rights in PERS vest on employment does not preclude modifications
of the system; that fact does, however, require that any changes
in the system that operate to a given employees disadvantage must
be offset by comparable new advantages to that employee.24 Judge
Christen found that for those members of the Plan who were not a
part of the 4-10 litigation, payment of the grievance constituted
an impact on the System without a corresponding benefit.
The Municipality argues that Judge Christen erred
because it was an expectation of the Plan that some contingencies
would arise that would result in a detriment with no
corresponding benefit to all members, such as a court-ordered
judgment for one member. This argument is supported by the
remainder of our decision in Hoffbeck. There, we weighed the
disadvantages of the reduced benefits against any advantages that
might have accompanied them, and concluded that, for at least
some of the members of PERS prior to the amendments, the
disadvantages of the amendments outweighed the benefits.25 But
noting that courts must construe statutory provisions as
constitutional where possible, we divided the public employees
into three groups, with different results attaching to each
group.26 We noted that the statute was unconstitutional for
enrollees hired before the effective date of the legislation who
chose not to receive a new benefits package, but not
unconstitutional as to the second group, enrollees in the plan
prior to the effective date of the amendments who opted to
receive the amended benefits.27 As for the third group, employees
who enrolled in PERS after the effective date of the legislation,
no constitutional violation was found because [i]t [was] clear
that the changes made in PERS did not unconstitutionally diminish
any vested rights of members of the third group.28
Here, the members of the System opted into the restated
Plan in 2000 with the understanding that retroactive compensation
might impact the liabilities of the System and with notice that
the right to enhanced benefits was contingent on the availability
of surplus assets within the System. Therefore, there was no
change.
IV. CONCLUSION
The System provides that retroactive compensation
stemming from the settlement of grievances will be calculated
into compensation for the purposes of determining benefits and
will therefore result in increased costs to the System. Allowing
the System to absorb the impact of grievances therefore does not
constitute a change to the Plan or impair a vested right under
the Alaska Constitution. We therefore REVERSE the superior
courts determination in 3AN-03-04760 Civil that requiring the
System to absorb the impact of the liability is unconstitutional,
and AFFIRM the superior courts decision in 3AN-03-10273 Civil
that the Municipality is not required to absorb the impact.
_______________________________
1 Municipality of Anchorage v. Gallion, 944 P.2d 436, 437-
38 (Alaska 1997) (Gallion I).
2 Gallion v. Anchorage Police & Fire Ret. Sys. and
Municipality of Anchorage, Superior Court No. 3AN-98-04563 Civil.
3 The conditional settlement also resulted in settlement
of Gallion I, discussed more fully below, and two separate
lawsuits, Woolsey v. Municipality of Anchorage, Superior Court
No. 3AN-93-05222 Civil, and Mower v. Municipality of Anchorage,
Superior Court No. 3AN-97-07364 Civil.
4 Superior Court No. 3AN-03-10273 Civil.
5 Superior Court No. 3AN-03-04760 Civil.
6 Ellison v. Plumbers & Steam Fitters Union Local 375,
118 P.3d 1070, 1073 (Alaska 2005); Alaska Legislative Council v.
Knowles, 86 P.3d 891, 893 (Alaska 2004).
7 Schaub v. K & L Distribs., Inc., 115 P.3d 555, 559
(Alaska 2005).
8 Rockstad v. Erikson, 113 P.3d 1215, 1219 (Alaska 2005).
9 944 P.2d at 438.
10 Id. at 442.
11 Id.
12 Id. at 443.
13 Id.
14 The Board also cites a number of cases from other
jurisdictions for the proposition that Alaska is not alone in
determining that the use of retirement assets for the benefit of
the plan sponsor is constitutionally impermissible. But these
cases are only persuasive if we adopt the Boards characterization
of the Municipalitys settlement of the Stillman grievance as
misdirecting plan assets, which we decline to do.
15 978 F.2d 325 (7th Cir. 1992). The Board also relies
upon United States v. City of Miami, 195 F.3d 1292 (11th Cir.
1999), which is not on point. It speaks only to whether the
district court imposed an excessive remedy when it awarded a
disproportionate thirty-five retroactive promotions when only two
would have been available absent discrimination. Id. at 1297-98.
16 City of Chicago, 978 F.2d at 327-30.
17 Id. at 333-34.
18 Universal Motors, Inc. v. Neary, 984 P.2d 515, 518-19
(Alaska 1999).
19 DeNuptiis v. Unocal Corp., 63 P.3d 272, 277 (Alaska
2003).
20 Id.
21 732 P.2d 1083 (Alaska 1987).
22 Id. at 1087-88.
23 Id. at 1087 (citing Opinion of the Justices, 303 N.E.2d
320, 327 (Mass. 1973) (construing Mass. Gen. Laws ch. 32, 25(5)
(amended 1956)) (emphasis added by Sheffield court).
24 627 P.2d 1052, 1057 (Alaska 1981).
25 Id. at 1058.
26 Id. at 1059.
27 Id.
28 Id.
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