October 26, 2010
OLR BACKGROUNDER: LEGISLATIVE POWER TO MAKE CHANGES TO THE TEACHERS' RETIREMENT SYSTEM
By: John Moran, Principal Analyst
You asked whether the General Assembly has the power to make benefit or other changes to the Teachers' Retirement System (TRS), and, if so, whether the changes apply to teachers hired in the future, working teachers who are not vested, working teachers who are vested, and retired teachers. You also asked for relevant court decisions.
The Office of Legislative Research is not authorized to provide legal opinions and this report should not be construed as one.
The TRS is a state-run retirement system for Connecticut public school teachers. It is controlled by statute and its benefits are not subject to collective bargaining. By statute, the General Assembly may change TRS retirement benefits only for future teachers and for those working but not yet vested. (A teacher vests when he or she has worked for 10 years and thus becomes eligible for a retirement benefit.)
In recent years the legislature has enacted two laws that make certain TRS benefits contractual for vested teachers and retirees, thereby prohibiting subsequent General Assemblies from reducing these benefits.
The first of these acts, PA 03-232, contains language making certain TRS benefits “contractual” and barring future legislatures from changing them. Its legislative history indicates the legislature understood that the act would prevent future legislatures from changing the benefits deemed contractual. PA 07-186 linked the benefits to the issuance of bonds to help cover TRS pension liabilities, which strengthens legal arguments that the benefits cannot be changed while the bonds are outstanding. PA 03-232 and PA 07-186 excluded retiree health insurance benefits from the contractual protections, suggesting that health insurance could be altered by future legislatures even for vested employees and retirees.
This report also looks at two court decisions that appear to set the road map of what a law must include for it to bar benefit revision and alteration by subsequent legislatures. These two cases point out the need for a retirement statute to explicitly prohibit changes or revisions by future legislatures in order to make binding the statutory pension system. Connecticut's law concerning the specified TRS benefits includes the requisite wording.
RECENT PUBLIC ACTS MAKING TEACHERS RETIREMENT BENEFITS “CONTRACTUAL”
The legislature has enacted two laws that make certain TRS benefits contractual through statute rather than through a contract between the state and members of the TRS benefits (CGS § 10-183c).
PA 03-232 included many changes to the TRS but one of the most important was prohibiting the state from passing any law that diminishes specific retirement benefits (1) in effect on October 1, 2003, for active members vested in TRS as of that date or (2) for members not yet vested on October 1, 2003, in effect on the date they either vest or accumulate 10 years of credited service, whichever occurs later. It also extends the ban to diminishing any enhancements in the specified benefits enacted after October 1, 2003.
The prohibition applies to statutory TRS retirement provisions concerning:
1. credited service toward retirement;
2. retirement and survivors' benefits eligibility;
3. benefit formulas, payment schedules, and cost of living allowances;
4. death and survivors' benefits; and
5. disability benefits.
The act states specifically that these benefits are “contractual in nature and no public or special act of the General Assembly shall diminish such benefit . . . .” But the contractual protection explicitly excludes retired teachers' health coverage, health coverage contributions required of the retirees, and annual state contributions to the Teachers' Retirement Fund (TRF).
Legislative History of PA 03-232
The legislative history confirms the legislature's intent to limit future changes in TRS benefits. Rep. Johnston (51st District) addressed House Amendment “A” during the floor debate on May 27, 2003. He said the intent and the language “guarantees contractual benefits” for teachers. Johnston said:
“I think it' s a commitment that we' re honoring with our teachers that if they play by the rules they know that when they go out and they' re told what their pension is that we will not be able to unilaterally go back in the future by statute and change the amount of that pension.”
He also specifically pointed out areas that would not be contractually guaranteed:
“Due to the dynamic nature of health insurance and it's many changes and unpredictability we are also opting that out so that we don't find ourselves in some way that we are not able to respond to.”
Rep. Johnston answered several questions from legislators of both parties. Rep. Dickman (132nd) asked for a definition of “contractual obligations.” Rep. Johnston answered:
“We've made a deal: that teacher taught knowing what the rules were, that teacher had a right to that benefit and that we can't retroactively go back and change that benefit. We could do it prospectively, we could do it for teachers coming in that aren't vested we could make a change as we do with state employees, but we wouldn't be able to go back.”
The bill (HB 6696) passed unanimously, 148 to zero. It was approved by the Senate on June 3, 2003 on consent.
This act authorizes the state to issue general obligation bonds to fund up to $2 billion of the TRS's unfunded liability. It also makes all TRS benefits, except retirees' health coverage matters, contractual for all vested TRS members while the bonds are outstanding. By doing this it bars the state from unilaterally reducing retiree benefits until the state pays off the bonds. The bonds are expected to be “retired” (i.e., paid off) 25 years after issuance.
The act also guarantees TRS members who retire on or after September 1, 1992 an annual cost of living adjustment (COLA). Under prior law these retirees received a COLA only if TRS actuaries determined there were sufficient funds in the COLA account from investment earnings to pay for them.
PA 07-186 also reduced promised retirement COLAs for members who join TRS on or after July 1, 2007 (the act's effective date). For these members, TRS retirement COLAs will be the Social Security benefit COLA subject to a three-tier maximum based on TRF investment earnings. If total fund returns for the preceding year are less than 8.5%, the maximum COLA is 1%; if returns are between 8.5% and 11.5% the maximum is 3%; and if the returns are more than 11.5%, the maximum is 5%. (TRS members do not pay into Social Security; the act just uses the Social Security number as a guide.)
The way this act addresses COLAs is an example of how the legislature increased benefits for some retirees (by guaranteeing them an annual COLA) while reducing and limiting annual COLAs for a different group, those hired after July 1, 2007.
As with PA 03-232, this act explicitly excludes retirees' health coverage, retiree contributions toward health coverage, and annual contributions to the TRF from the language naming the contractual benefits. This appears to leave open the possibility of changing such benefit levels in the future.
Legislative History of PA 07-186
The floor debate in the House and the Senate did not address the issue of making certain benefits contractual under existing law or the bill under consideration at that time. There was some discussion and concern over making COLAs automatic for many retirees, rather than tying them to investment returns.
Nevertheless, the bill passed as amended in the House on June 4, 2007 by a vote of 145 to five. It passed in the Senate on June 5, 2007 by a vote of 34 to two.
RELATED COURT CASES
The requirements detailed in the following court decision provide a road map to the statutory language necessary for a court to find retirement benefits are protected from subsequent change. In both cases, the courts found the retirement statutes in question lacked the necessary protections. But in doing so, the decisions spell out what needs to be included to provide such protections.
Pineman Case in Connecticut
The Pineman case was a long-running lawsuit by state employees against a 1975 change the legislature made to the State Employees Retirement Act (SERA). The case was decided before state employees gained the right to bargain collectively over wages, retirement, and other benefits. At the time, SERA was the retirement plan and, as with any statute, was subject to change by the legislature. Pineman does not apply to state employee retirement today, because a contract explicitly addresses the retirement plan, but it provides background on how courts approach these issues when public retirement plans are controlled by statute (Pineman v. Fallon, 842 F.2d. 598).
PA 75-531 required both male and female state employees to reach age 55 before they could retire. Previously, women could retire at age 50, but men had to be 55. A federal court ruled this policy was unconstitutional. Until the legislature decided how to address the situation, the state briefly made the retirement age for everyone 50. When PA 75-531 passed, it, in effect, changed the retirement age for all state workers from age 50 to 55. A group of employees challenged the law in court arguing that anyone already working for the state should not be required to meet the new age 55 requirement.
After several rounds of decisions and appeals, the U.S. Court of Appeals for the 2nd Circuit ruled against the employees, upholding a federal district court judge's ruling. The federal district court judge had ruled SERA did not constitute a legally valid contract between the state and its employees that would prohibit the legislature from changing the terms of the retirement plan. The judge ruled that the legislature did not explicitly give up its power of revision or amendment and that such an intent had to be explicit in SERA in order to find for the employees.
Although the court found that some employees were harmed by the legislature's action, the legislature enacted PA 75-531 to address an inequity between when women and men working for the state could retire with full benefits, and it included measures to mitigate the harm for some employees who were near retirement.
The employees appealed to the U.S. Supreme Court, but the court declined to hear the case.
Rhode Island Public Employee Case
A federal appeals court ruling on a Rhode Island case likewise found the statutory Rhode Island public employees pension system did not constitute a contractual obligation between the employees and the state (National Educ. Ass' n-Rhode Island v. Retirement Board of Rhode Island, 172 F.3d 22 (1st Cir. 1999)). The decision pointed out that, for a legislature to make a “legislative contract” and thus forbid future legislatures from changing the retirement plan, the statute must explicitly say it prevents future legislatures from making changes. The court stated:
“The clear statement requirement for 'legislative' contracts has been regularly imposed by the Supreme Court and followed by this court.
“We do not think the Rhode Island general pension statute 'clearly and unequivocally' contracts for future benefits either by language or – in the circumstances of the case – through the nature of the relationship. Nowhere does the statute call the pension plan a “contract” or contain an anti-retroactivity clause as to future changes.”