Request By:
Hon. Arthur Schmidt
Chairman, LRC Special Subcommittee on Equalization of Retirement Benefits
State Capitol Building
Third Floor
Frankfort, Kentucky 40601
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Patrick B. Kimberlin, III, Assistant Attorney General
This is in response to your recent letter wherein you ask our opinion as to certain matters relating to the five state retirement systems: Kentucky Employes Retirement System (KERS), County Employes Retirement System (CERS), State Police Retirement System (SPRS), Judicial Retirement System (JRS), and Kentucky Teachers' Retirement System (KTRS). You point out that your subcommittee is considering the recommendation that the General Assembly limit retirement benefits of the aforementioned retirement systems so that an employe's annual retirement benefits from a state retirement system plus social security do not exceed either 90 % or 100 % of his final annual salary.
Our research into the law of Kentucky pertaining to public retirement systems in this jurisdiction has revealed that Kentucky courts have traditionally held that statutes providing for pensions for public employes were subject to repeal or modification as to non-retired employes, such employes being accorded no vested rights.
Rohe v. Covington, 255 Ky. 164, 73 S.W.2d 19 (1934);
Head v. Jacobs, 150 Ky. 290, 150 S.W. 349 (1912). Only when a public employe actually fulfilled the conditions for payment of a pension were his pension rights considered vested and free from being abrogated or altered.
Miller v. Price, 282 Ky. 611, 139 S.W.2d 450 (1940). In
City of Louisville v. Board of Education of Louisville, 291 Ky. 7, 163 S.W.2d 23, 25 (1942), the then Kentucky Court of Appeals stated quite explicitly that "in no pension is there a vested right until the participant has become an actual beneficiary." 1 See Generally Pensions and Retirement Funds, 60 Am.Jur.2d, § 46-49.
However, it is interesting to note that there have been no opinions rendered by the highest court in the Commonwealth of Kentucky in the last thirty years dealing directly with the issue of the nature of a public employe's "rights" to a public pension. This is significant in light of recent statutory authority which, as you have noted, has arisen in the public retirement system laws in Kentucky dealing with the state public retirement systems. With the exception of KTRS, all other public retirement systems in question have enacted statutes stating in effect that the respective retirement statutes of each system "shall constitute an inviolable contract of the Commonwealth" and the benefits provided by those statutes could not therefore be subject to reduction or impairment by alteration, amendment or repeal. KRS 61.692 (KERS), KRS 78.852 (CERS), KRS 16.652 (SPRS), and KRS 21.480 (JRS).
With the foregoing in mind, we will now consider the questions you have presented to us in your letter:
"(1) Do the five retirement system benefit plans constitute contracts between the state and members of the retirement systems, within the meaning of Kentucky Constitution Section 19 and United States Constitution Article 1, Section 10?" 2
It is our opinion that, in light of the foregoing statutory authority, the Commonwealth has created a contractual obligation with the members of the various retirement systems as a consequence of which the General Assembly cannot limit retirement benefits to certain maximum percentages of final annual salary as suggested in your letter. We believe that such a limitation on the members of those systems, both retired and non-retired, would be in direct violation of the aforementioned state and federal constitutional provisions. 3
Moreover, we believe that this comports with current trends in public pension law throughout the country. In the past, public pensions were not considered a contractual obligation but a mere gratuitous allowance, not involving any vested rights and the pension was terminable or alterable at the will of the grantor except where the pension had come due. 52 A.L.R.2d, Section 3. However, the new concepts dealing with public pensions are predicated upon the theory that such pensions are actually a part of compensation (deferred in nature) to which the public employe is entitled for services rendered, and in which he has certain rights which cannot be abrogated at the will of the government. In at least one state, New York, the state constitution was amended to provide for vesting of public employes' rights contractually in the public retirement system. Thereafter, the New York appellate courts refused to permit the use of new mortality tables which would have had the effect of reducing upon retirement, the annuities of all members of the teachers retirement system in New York by 5 % as an infringement of Section 7 of Article 5 of the state
Constitution. Birnbaum v. New York State Teachers Retirement System, 176 N.Y.S.2d 984, 152 N.E.2d 241 (1958); Also see Validity And Effect Of Retroactive Change In Return Of Employes Contribution To Public Pension Fund, 78 A.L.R.2d 1197; and 60 Am.Jur.2d, Section 64. Furthermore, it has been the rule in California that a public pension constitutes deferred compensation earned immediately upon performance of services by the public employe and therefore cannot be destroyed without impairing the attendant contractual obligation created thereby.
Miller v. State, 135 Cal.Rptr. 386, 557 P.2d 970 (1977);
Ruster v. Ruster, 114 Cal.Rptr. 812, 40 Cal.App.3d 379 (1974). And, New York courts have pointed out that such public pensions are given in consideration of services not fully recompensed and that they induce long and faithful service on the part of public employes.
Herreboudt v. Board of Education of Peekskill City School District, 245 N.Y.S.2d 612 (1963).
In any event, the enactment by the General Assembly of the previously cited statutes creating an "inviolable contract" between the members of those public retirement systems and the Commonwealth of Kentucky would constitutionally foreclose the General Assembly from now enacting legislation creating a limit on the amount of a pension to be paid. 4 Kentucky Constitution, Section 19; United States Constitution, Section 10.
Finally, it is also our opinion that the concept of an "inviolable contract" mentioned above, would also apply to the KTRS even though that particular public retirement system does not have a statute specifically dealing with that concept as do the other four public retirement systems. Our reasoning in this regard is based upon the fact that the purpose behind the KTRS, like the other four public retirement systems, is to provide an income to a class of statewide public employes in the event of their retirement or disability. Accordingly, it is our belief that the "inviolable contract" set out by statute in the other four public retirement systems can equally be made to apply to the KTRS because those statutes are in effect in pari materia 5 to the KTRS. Thus, construing the law dealing with these five public retirement systems together, said systems having a common purpose, it is our opinion that the contractual obligation of the Commonwealth in this particular public pension area would be applicable to the KTRS as well as the other four public retirement systems.
"(2) If the retirement plans constitute contracts, to what extent may the General Assembly apply a percentage limit on retirement benefits? Specifically, could such a limit be applied to the benefits of:
(a) only future members of the retirement systems?
(b) current, but non-vested members of the retirement systems?
(c) non-retired members who are vested?
(d) members of the system who have retired and are receiving benefits, or whose estate or designated beneficiary is receiving benefits?"
It is our opinion that the General Assembly may apply a percentage limit on retirement benefits as you have suggested in your letter but that such a limitation may be applied only prospectively as to present non-retired members and, of course, all future members of the five public retirement systems in question in light of the contractual obligation of the Commonwealth, as previously discussed. Such a limitation could not be applied retroactively to any member, retired or otherwise, but could only effect their retirement accounts and eligibility benefits insofar as such rights and benefits accrued after the date of enactment of such a law.
"(3) Would it be sufficient for the General Assembly to guarantee members and retirees only the amount each has contributed toward his retirement benefits? "
Generally speaking, public retirement systems are purely creatures of statute. The legislative branch has the power to alter the complexion and nature of such a retirement system by enacting whatever laws it deems appropriate and which, of course, are not unconstitutional as violative of "vested" or contractual rights. 6 It is our opinion that the General Assembly could enact legislation guaranteeing members of the five public retirement systems in question here only the amount each has contributed toward his retirement benefits. However, in light of the statutory provisions dealing with the "inviolable contract" concept and its attendant constitutional implications, we believe that such legislation may not have retroactive effect.
In closing we would emphasize that the conclusions we have reached in this Opinion are predicated upon our interpretation of the constitutional ramifications of KRS 61.692, KRS 78.852, KRS 16.652 and KRS 21.480. It is, of course, possible that different conclusions might be reached by a court of law. 7
Footnotes
Footnotes
1 For analysis of Kentucky law on this particular issue see Vested Right Of Pensioner To Pension, 52 A.L.R.2d 437, Section 15.
2 Kentucky Constitution, Section 19: "No ex post facto law or any law impairing the obligations of contracts shall be enacted." United States Constitution, Section 10: "No state shall . . . pass any . . . law impairing the obligation of contracts. . . ."
3 We believe the aforementioned statutes are not susceptible to any other interpretation. Compare State ex rel Holton v. Tampa, Fla., 159 So. 292 (1934); 98 A.L.R. 501.
4 See Holsclaw v. Stephens, Ky., 507 S.W.2d 462, at 479 (1974), wherein the "inviolable contract" theory was mentioned but not dealt with directly.
5 See generally Dunlap v. Littell, 200 Ky. 595, 255 S.W. 280 (1923); Milner v. Gibson, 249 Ky. 594, 61 S.W.2d 273 (1933).
6 For example, in Louisville Policemen's Retirement Fund v. Bryant, Ky., S.W.2d (rendered Sept. 16, 1977), the Kentucky Supreme Court held that a member of a municipal policeman's retirement fund was not entitled to even a refund of contributions in light of city ordinance providing for no refund if the member has not completed five years of service.
7 For example, see generally, Constitutionality, Construction, And Application Of Statute Or Ordinance Providing For Reduction Of Pension Or Retirement Benefit Of Public Officer Or Employee Because Of Independent Income, 7 A.L.R.2d 692. However, the foregoing Annotation does not deal with the type of statutes which form the basis of this Opinion.