In discussing changes to public employee benefits, a critical question is which groups of employees they should be applied to. There is no legal or moral limit to changes for new employees. It would be both illegal and immoral in most instances to make big changes to benefits of those already retired. For the cases in between — employees with less than ten years of service who are not vested, employees with vested retirement benefits, employees near retirement — the moral considerations and the legal limitations are vaguer. This page reviews some of the Massachusetts law on the question.
In summary, the law appears to be that the terms of the pension vest as contractual rights at the time of employment. However, the courts recognize the complexity of pension systems and disavow a rigidly contractual approach. Two kinds of modifications may be justified:
- Reasonable modifications consistent with the theory of the pension system. While the pension benefit is contractual, the system is complex and may be modified to reflect changing conditions or to maintain integrity. Modifications in this category might be required to balance advantages and disadvantages for the employees, but have been permitted without givebacks where they eliminate unfair features of the system.
- Modifications in cases of extreme necessity. The state reserves police powers that would allow it in certain extreme cases to abrogate contracts. Mere financial hardship on a governmental entity is not sufficient, but catastrophic financial collapse might be sufficient.
The leading opinion on the extent to which public employee benefits may be applied to existing employees and retirees is Opinion of the Justices to the House of Representatives, 364 Mass. 847 (1973). The case law review for this posting was limited to Massachusetts appellate court cases that cite this case or cite the underlying statute, G.L. c. 32, s. 25.
In that advisory opinion, the Supreme Judicial Court considered the question of whether the legislature could increase the required contribution that employees were making to their pension benefits. The court found that such a change would be presumptively invalid, although it could perhaps be justified under certain circumstances. The court rested its opinion language on the Massachusetts pension statute, G.L. c. 32, s. 25(5), which had recently been rewritten to define pension benefits as contractual. It favorably cited language from a California opinion on the ability to change contractually committed benefits:
Summing up the attitude of that State [California] as it has evolved, an intermediate appellate court said in Wisley v. San Diego, 188 Cal. App. 2d 482, 485-486 (1961): “Where a city charter provides for pensions, it is well settled that the pension rights of the employees are an integral part of the contract of employment and that these rights are vested at the time the employment is accepted. An amendment to the charter which attempts to take away or diminish these vested rights is an unconstitutional impairment of contract. However, this does not preclude reasonable modifications of the pension plan prior to the employees’ retirement. Reasonable modifications are often necessary in order that the pension system may be kept flexible, to permit adjustments in accord with changing conditions and to maintain the integrity of the system in order to carry out its beneficent purpose. . . . To be sustained as reasonable, alterations of the employees’ pension rights must bear some material relationship to the theory of a pension system and its successful operation, and changes which result in a disadvantage to the employees should be accompanied by comparable new advantages. . . . The validity of attempted changes in vested pension rights depends upon the advantage or disadvantage to the individual employee whose rights are involved, and benefits to other employees cannot offset detriments imposed upon those whose pension rights have accrued.” [Note 17] See Bakenhus v. Seattle, 48 Wash. 2d 695, 698 (1956).
We think the “contractual relationship” envisaged by Section 25 (5) has similar tolerances.
Id. at 862-3. At foot note 18, however, the court states:
An alternative analysis, which language in the California and other decisions may support, is that the State’s police power can readily be used to sustain legislation overriding the precise terms of a retirement plan in order to achieve actuarial soundness or the like.
The court elaborates this police power a little further noting that:
[I]t is basic that the State reserves police powers that may in a particular predicament enable it to alter or abrogate even conventional contractual rights. . . . That the maintenance of a retirement plan is heavily burdening a governmental unit has not itself been permitted to serve as justification for a scaling down of benefits figuring in the “contract,” although no case presenting proof of a catastrophic condition of the public finances has been put. . . . It should be added that the Legislature’s opinion that justification does in fact exist for the modification of a plan is entitled to judicial respect; especially so if that opinion is buttressed by prior formal investigation of the facts.
Ultimately, the court concludes that no factual showing of hardship justifying use of the police powers had been put forth — there was no underlying litigation, merely a question from the legislature — and stated that absent such a showing the proposed increase in contribution rates would be invalid.
More recent SJC cases tend to affirm this opinion as authoritative and shed a little bit of additional light on available legislative choices.
In McCarthy v. Sheriff of Suffolk County, 366 Mass. 779 (1975), The Supreme Judicial Court found that a reduction of mandatory retirement age was not prohibited by the constitution or by G.L. c. 32, s. 25(5). The court explained their then recent Opinion discussed above.
In our recent Opinion of the Justices, 364 Mass. 847 (1973), we examined the legislative history of Section 25 (5) in order to determine the scope of the contractual rights created by that section. We held that, at a minimum, Section 25 (5) creates a contractual relationship wherein members of the system are entitled to have the level of rights and benefits in force when they became members preserved substantially in their favor without modification downward. Id. at 860. In characterizing the nature of the contractual rights created, we stated that they are “best understood as meaning that the retirement scheme has generated material expectations on the part of employees and those expectations should in substance be respected.” Id. at 861. We went on to say that members of the plan should be protected in the core of their reasonable expectations. Ibid. The key to the contractual relationship established by Section 25 (5), then, is those material expectations which can reasonably be said to affect an employee’s decision to accept, and stay employed in, a position with the Commonwealth. See, generally, Cohn, Public Employee Retirement Plans — The Nature of the Employees’ Rights, 1968 U. of Ill. L. Forum 32. See also 1955 House Doc. No. 2500, pp. 105-108 (minority report). We cannot say that the plaintiffs, in accepting employment with the Commonwealth and in joining the retirement plan, could have had a reasonable expectation that they would be guaranteed employment as court officers until age seventy, considering the extensive power of the Legislature to change, or in fact to do away with, their positions.
Id. at 783-4.
- In Glynn vs. Clerk of the Superior Court, 404 Mass. 1002 (1989), the Supreme Judicial Court held that accumulated sick leave benefits were not constitutionally protected from alteration.
- In Masschusetts Community College Council v. Commonwealth, 420 Mass. 126 (1995), the Supreme Judicial Court considered the validity of furloughs imposed on union workers in violation of collective bargaining agreements. The court concluded that (1) the impairment was a violation of the contract; (2) the commonwealth may alter contracts “if necessary and reasonable to serve an important public purpose”; (3) increasing financial squeeze that was merely an increase of a known problem, not an unforseeable problem, did not constitute sufficient reasons to alter a contract.
- In Madden v. Contributory Retirement Appeal Board, 431 Mass. 697 (2000), the court considered the ability of the Teachers Retirement Board to apply a new regulation pro-rating creditable service for part-time employees. The court found that the Board could not retroactively apply the rule (so taking away service already credited), but that it could apply the rule prospectively to existing employees, stating:
We have recognized that “paying excessive benefits to some claimants puts a strain on the system in making the payments due to others.” Massachusetts Teachers Ass’n v. Teachers’ Retirement Bd., 383 Mass. 345 , 348-349 (1981). The TRB’s attempt at correcting the disparity certainly “bear[s] some material relationship to the theory of a pension system and its successful operation” by assuring that members receive a proportional share of retirement benefits and, thus, can be prospectively enforced without upsetting the contractual expectation of retirement system members. Opinion of the Justices, supra at 862. Therefore, the TRB can, consistent with Madden’s contractual expectations, prorate her part-time service worked after the promulgation of s. 3.04.
Id. at 703-4.
- In MacLean v. State Board of Retirement, 432 Mass. 339 (2000), the Supreme Judicial Court held that refinements of law governing forfeiture of state contracts were not changes that would violate the reasonable expectations of an employee, stating “State pension benefits have been, and are, the subject of a great deal of regulation, and it therefore would have been unreasonable for an employee to think that the list of events triggering forfeiture was immutable.” 432 Mass. at 345.
- In State Board of Retirement v. Fran Woodward, 446 Mass. 698 (2006), the court held that an action for forfeiture of pension rights was not limited by the statute of limitations for contract actions, stating, “Our conclusion is bolstered by the fact that, although there is a form of contractual relationship between members and their retirement system, the contractual aspects are special and limited.” 446 Mass. at 706.
There are also a number of Appeals Court cases on related issues:
- In Dullea v Massachusetts Bay Transportation Authority, 12 Mass. App. Ct. 82 (1981), the Appeals Court held that retraction of pension benefits changes by the MBTA 37 days after they were approved was not prohibited by the constitution, reasoning based on the Opinion of the Justices discussed above. The court explained the philosophy of that opinion stating “These principles avoid rigid adherence to strictly formalistic doctrine by balancing the interests of the governmental employer in revising plans to ensure their soundness with the legitimate reliance interests of employees who look to pensions as a substantial benefit accruing from the satisfactory performance of long-term service.”
- In Allison v. Whittier Regional, 15 Mass. App. Ct. 944 (1983), a case involving retirement of a local school teacher as a result of the regionalization of vocational instruction, the appeals court referred to the Opinion of the Justices discussed above in ordering that the district pay health care benefits to the teacher. The court suggested that the benefits were within the “core of reasonable expectations” of compensation held by the employee. This opinion also relies on local particular by-laws that were applicable.
- In Colo v. Contributory Retirement Appeal Board, 37 Mass. App. Ct. 185 (1994), the Appeals Court held that a call firefighter’s expectation of creditable years based his years of service could not be defeated by legislation subsequent to his employment.
- In Dupont v. Commissioners of Essex County, 46 Mass. App. Ct. 235, 239 n.10 (1999), and more fully in Prudential Committee v. Barnstable Country Retirement Association, 50 Mass. App. Ct. 907 (2000), the appeals court held that a change streamlining termination procedures was not within the protections of G.L. 32, s. 25(5) and could be applied retroactively.
The holding in Dupont followed views of the scope of s. 25(5) taken in Opinion of the Justices, 364 Mass. 847 , 856-863 (1973), and McCarthy v. Sheriff of Suffolk County, 366 Mass. 779 , 781-785 (1975). These views were that the member of a retirement system was protected in the core of his reasonable expectations as to pension and benefits, but not against any adjustment in the job, e.g., disciplinary rules or retirement age, Opinion of the Justices, supra at 861-862, and that s. 25(5) was designed to give pension security, not job security. McCarthy, supra at 784. What lies at the core of reasonable expectations are those “which can reasonably be said to affect an employee’s decision to accept, and stay employed in, a position with the Commonwealth.” Ibid. The precise nature of the hearing to be afforded in connection with discharge proceedings is not the pivot upon which a person would take or stay in a job.
50 Mass. App. Ct. at 907-8.
Massachusetts cases distinguishing themselves from the Opinion of the Justices involved continuation of policies to the detriment of employees, rather than changes. Maddocks v Contributory Retirement Appeal Board, 369 Mass 488 (1976), Boston Association of School Administrators and Supervisors v Boston Retirement Board, 383 Mas. 336 (1981).