Wash. Educ. Ass'n v. Wash. Dep't of Ret. Sys.

181 Wash.2d 233

332 P.3d 439

WASHINGTON EDUCATION ASSOCIATION; Stacia Bilsland and Kathleen Raney, on their own behalf and on behalf of all others similarly situated, Respondents,

v.WASHINGTON DEPARTMENT OF RETIREMENT SYSTEMS; State of Washington, Petitioners.

Washington Federation of State Employees; Paulette Thompson; Bob Keller, and all others similarly situated, Respondents,

v.Washington Department of Retirement Systems; State of Washington, Petitioners.

Retired Public Employees Council of Washington; and Howard N. Jorgenson, on his own behalf and on behalf of all similarly situated individuals, Respondents,

v.Washington Department of Retirement Systems; State of Washington, Petitioners.

No. 88546–0.

Supreme Court of Washington, En Banc.

Aug. 14, 2014.

Timothy George Leyh, Randall Thor Thomsen, Katherine See Kennedy, Calfo Harrigan Leyh & Eakes LLP, Seattle, WA, Anne Hall, Office of The Attorney General, Sarah Elizabeth Blocki, Attorney at Law, Olympia, WA, for Petitioner.

Donald E. Clocksin, Attorney at Law, Harriet Kay Strasberg, Attorney at Law, Edward Earl Younglove III, Younglove & Coker, PLLC, Olympia, WA, Richard E. Spoonemore, Eleanor Hamburger, Sirianni Youtz Spoonemore Hamburger, Seattle, WA, for Respondent.

Rebecca R. Glasgow, Attorney General's Office, Olympia, WA, Amicus Curiae on behalf of Washington State School Directors' Association.

Keith Alan Buchholz, Washington State Senate, Jeanine Marie Gorrell, Washington State Senate, Timothy George Sekerak, House of Representatives, Olympia, WA, Amicus Curiae on behalf of Washington State Legislature.

Josh Weiss, Washington State Ass'n of Counties, Olympia, WA, Amicus Curiae on behalf of Washington State Association of Counties.

Daniel G. Lloyd, Vancouver City Attorney's Office, Vancouver, WA, Amicus Curiae on behalf of Washington State Association of Municipal Attorneys, Association of Washington Cities.

MADSEN, C.J.

¶ 1 The Washington Department of Retirement Systems (DRS) and the State of Washington petition for review of an order granting summary judgment to a class of public employee unions and unaffiliated employees and holding that the 2011 repeal of legislation granting future uniform cost of living adjustments (UCOLA) to the respondents' monthly pension payments was an unconstitutional impairment of the State's contractual obligation with its employees. We disagree because the legislature reserved its right to repeal the pension rights at issue and the original enactment of UCOLA did not impair any existing contract rights of state employees. Accordingly we reverse.

FACTS AND PROCEDURAL HISTORY

¶ 2 The Public Employees' Retirement System (PERS) Plan 1 and the Teachers' Retirement System (TRS) Plan 1 governed the state's pre–1977 pension program for school teachers, administrators, and other state employees. Because PERS Plan 1 and TRS Plan 1 provide substantially the same benefits, they will together be referred to as “Plan 1.” On October 1, 1977, the legislature eliminated Plan 1 as an option for new employees, replacing Plan 1 with Plan 2 and later adding Plan 3 as a second option. Current Plan 1 members therefore all entered state employment before October 1, 1977. Plan 1 is a defined benefit plan where, after retirement, members are paid a fixed monthly pension amount irrespective of their level of contribution. A statutory formula determines Plan 1 members' pension amounts, looking to the members' years of service and average compensation level during their highest two consecutive years. SeeRCW 41.32.498; RCW 41.40.185 (outlining that the Plan 1 annual retirement allowance shall be two percent of the employee's average final compensation for each service credit year). Plan 1 is contributory; the benefit is paid out of contributions from the employer and the employee, as well as investment returns on prior contributions. Employee contribution is capped, whereas the employer contribution level can vary with need and is set by the legislature biennially. As it originally stood, Plan 1 did not include any adjustment for changes in cost of living.

¶ 3 As the years progressed, pressure mounted to adjust pensions to reflect greater retiree longevity and increased inflation. Beginning in the early 1970s, the legislature enacted a series of cost of living adjustments (COLAs) that were limited to specific groups and time periods. In 1973, the legislature provided an adjustment based on a cost of living factor. This COLA stated that an adjustment “shall” be made, “provided, that the department finds, at its sole discretion” that the system assets could fund the COLA. Former RCW 41.32.499 (1994) (capitalization omitted); former RCW 41.40.195 (1994). Under this scheme, COLAs were never granted to TRS Plan 1 employees and were granted only through 1980 to PERS Plan 1 employees. Hence, for the 15 years prior to the creation of a uniform COLA system in 1995, DRS never exercised its discretion to grant a COLA under the 1973 provision. In subsequent years the legislature enacted three other COLAs to benefit discrete populations of the state employee community: minimum retirement allowance recipients, retirees whose benefit had lost a specified amount of its purchasing power, and retirees who were at least 70 years old.¹

¶ 4 In 1995, motivated by the desire to simplify calculations, expand coverage, and streamline the administration of COLA benefits, the legislature passed a UCOLA scheme. Laws of 1995, ch. 345, § 1. UCOLA repealed the 1973 COLA and the purchasing power COLA, and made the age–70 COLA permanent for those already receiving it. Final B. Report on Substitute S.B. 5119, 54th Leg., Reg. Sess. (Wash.1995). UCOLA also replaced the old minimum benefit COLA with a new minimum allowance of $24.22 per year of service, to be adjusted annually for cost of living in the same manner as all pensions. RCW 41.32.4851; RCW 41.40.1984.

¶ 5 UCOLA created a monthly increase amount per year of service (annual increase amount). Laws of 1995, ch. 345, §§ 2, 5. At the time of UCOLA's enactment in 1995, the annual increase amount was $0.59 per year of service. Former RCW 41.32.010(47) (1995); former RCW 41.40.010(40) (1995); Br. of Pet'rs' at 8 n. 10.² Disbursement of UCOLA benefits was not linked to actual increases in cost of living or inflation; the annual increase amount accrued automatically each year to eligible Plan 1 retirees. See former RCW 41.32.489(1) (1995); former RCW 41.40.197(1) (1995). Under UCOLA, the initial annual increase amount of $0.59 increased by three percent each year so that in 2011, it was set at $1.94 per year of service. Former RCW 41.32.010(47); former RCW 41.40.010(40) (1995); Br. of Pet'rs' at 8 n. 10. ³

¶ 6 To prevent a perpetual obligation to increase the COLA amount each year, the legislature included a clause that reserved its right to modify or repeal the UCOLA scheme in the future and specified that it was not creating any contract rights. Former RCW 41.32.489(6); former RCW 41.40.197(6). “The legislature reserves the right to amend or repeal this section in the future and no member or beneficiary has a contractual right to receive this postretirement adjustment not granted prior to that time.” Former RCW 41.32.489(6); former RCW 41.40.197(6).

¶ 7 In 2011, responding to the ongoing financial crisis and state actuary reports that Plan 1 was underfunded, the legislature exercised its reserved right and repealed UCOLA. Laws of 2011, ch. 362, § 1 (“The legislature now finds that changing economic conditions have also made necessary the amendatory provisions contained in this act.”). Because employee contribution to Plan 1 was capped and the legislature was reluctant to force employers to contribute more, UCOLA was being funded primarily with current Plan 1 assets. Plan 1 thus became underfunded and the legislature responded with repeal. Under the terms of the repeal, the annual increase amount will cease increasing by three percent each year. Instead, it will remain locked at the July 1, 2010 amount per service year. RCW 41.32.489(1); RCW 41.40.197(1). Retirees already receiving pension payments will not lose the UCOLA amounts that have already been designated to them but in the future will receive pensions as adjusted on July 1, 2010 rather than the current year. Plan 1 employees who have not yet retired will not receive any UCOLA adjustments. RCW 41.32.489(1)(b) (“After July 1, 2010, no annual increase amounts may be provided to any beneficiaries who are not already receiving benefits under this section.”); RCW 41.40.197(1)(b) (same). The legislature excluded the minimum benefit COLA from the repeal and in fact increased the minimum benefit amount. RCW 41.32.4851; RCW 41.40.1984. The minimum benefit thus continues to be adjusted upward each year. The state actuary estimates that the repeal of UCOLA will save the state over seven billion dollars over the next 25 years.

¶ 8 On October 12, 2011, the Washington Education Association and a class of Plan 1 employees filed a complaint in Thurston County Superior Court challenging the 2011 repeal of UCOLA. The plaintiffs raised four claims, one of which alleged that the repeal of UCOLA was an unconstitutional impairment of the state's contract with its employees.⁴ In April 2012, the plaintiffs filed a motion for summary judgment on this contract impairment claim. The trial judge granted summary judgment to the plaintiffs, reasoning that the repeal was an unconstitutional impairment. The defendants, DRS and the State, then filed a motion for certification under RAP 2.3(b)(4) and a notice of discretionary review in this court. The trial court certified a class that includes all Plan 1 members, retired or working, all of whom became state employees prior to October 1, 1977.⁵ In June 2013, this court granted the petitioners' motion for discretionary review to address their contract impairment claim and designated the case for direct review under RAP 6.2(a) as a companion to...