Request By:
Brian Crall
State Representative for the 13th District
Opinion
Opinion By: Gregory D. Stumbo, Attorney General; Michelle D. Harrison, Assistant Attorney General
Opinion of the Attorney General
Representative Crall has asked us to determine whether the General Assembly can retrospectively prohibit the practice known as "double dipping. " It is our opinion that a retroactive amendment to KRS 61.637(7)(a) would "impair the obligations" of the "inviolable contract" of the Commonwealth created by KRS 61.510 to 61.705 thereby interfering with the vested rights of current members of the Kentucky Retirement Systems in violation of both the Contract Clause of the United States Constitution and its state counterpart, Section 19 of the Kentucky Constitution. Because any attempt by the General Assembly to suspend or reduce the benefits of those members whose rights have vested upon their reemployment would be unconstitutional, we conclude that the General Assembly can only prohibit "double dipping" on a prospective basis, if at all.
Resolution of the question presented necessarily begins with a review of KRS 61.692, pursuant to which KRS 61.510 to 61.705 "constitutes an inviolable contract of the Commonwealth" for the benefits provided therein. KRS 61.692, Benefits not to be reduced or impaired; exception, provides:
It is hereby declared that in consideration of the contributions by the members and in further consideration of benefits received by the state from the member's employment, KRS 61.510 to 61.705 shall, except as provided in KRS 6.696 effective September 16, 1993, constitute an inviolable contract of the Commonwealth, and the benefits provided therein shall, except as provided in KRS 6.696, not be subject to reduction or impairment by alteration, amendment, or repeal.
Prior to 1998, KRS 61.637(1), in relevant part, provided that "[a] retired member who is receiving monthly retirement payments under any of the provisions of KRS 61.515 to 61.705 and 78.520 and 78.852 and who is reemployed as an employee by a participating agency shall have his retirement payments suspended for the duration of reemployment. " During its 1998 session, however, the General Assembly amended KRS 61.637 to allow retired members to be reemployed by a participating agency without suspension of their retirement payments. Pursuant to the subject amendment, those members were also allowed to begin a second retirement account to which they could make contributions while continuing to receive retirement payments from their initial retirement account, the practice commonly known as "double dipping. " See 1998 Ky. Acts ch. 105, sec. 28. In the current version of KRS 61.637, the amendment is codified as subsection (7)(a) which provides:
Effective August 1, 1998, the provisions of subsections (1) to (4) of this section no longer apply to a retired member who is reemployed in a position covered by the same retirement system from which the member retired. Reemployed retired members shall be treated as new members upon reemployment. Any retired member whose reemployment date preceded August 1, 1998, who does not elect, within sixty (60) days of notification by the retirement systems, to remain under the provisions of subsections (1) to (4) of this section shall be deemed to have elected to participate under this subsection.
When viewed in conjunction with KRS 61.692, this provision gives retired members of the Kentucky Retirement Systems a contractual right to be "reemployed in a position covered by the same retirement system from which the member retired" without forfeiting their monthly retirement payments, the result envisioned by the General Assembly as evidenced by the language employed. "It is a familiar principle of constitutional law that constitutional and statutory provisions in effect at the time a contract is made become a part of the contract."
City of Florence v. Owen Electric Cooperative, Inc., Ky., 832 S.W.2d 876, 882 (1992). Although our research has revealed no authority that is directly on point, we are not without guidance in determining whether the General Assembly can now prohibit this practice retrospectively.
In
Jones v. Bd. Of Trustees of Kentucky Retirement Systems, Ky., 910 S.W.2d 710, 713 (1995), the Kentucky Supreme Court conclusively resolved any question regarding the impact of the inviolability exception, recognizing "that the retirement savings system has created an inviolable contract between KERS members and the Commonwealth." Early on, the Attorney General recognized the effect of this provision, concluding that the Commonwealth has a contractual obligation to 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." OAG 78-4., p. 2. Reiterating this view, this office later observed that the "employee's retirement plan is part and parcel of his employment contract and constitutes an inviolable contract of the Commonwealth between the employee and his employer, the State." OAG 90-6, p. 3; See also OAG 81-416. Further, this inviolable contract "includes the retirement program as a whole." OAG 90-6, p. 5.
As observed by the Court in Jones, the General Assembly "can take no action to reduce the benefits promised to participants, . . ." "Any reduction or demonstrable threat" to the benefits promised to members upon retirement "might well run afoul of Section 19 of the Kentucky Constitution." Jones, supra, at 713. Because there had been "no showing that the retirement benefits promised to KERS members had been or [would] be infringed" by the actions of the General Assembly in Jones, however, the Court left that issue for another day. Id. In contrast, legislation retroactively prohibiting the practice of "double dipping" would, by design, infringe upon the retirement benefits promised to current members, so the question necessarily becomes whether such an infringement constitutes a violation of the Contract Clause and Section 19.
A prerequisite to application of the Contract Clause in the current context, i.e., asserted impairment of a contract by state legislative action, "is that the challenged law operate with retrospective, not prospective effect."
Maryland State Teachers Ass'n, Inc. v. Hughes, 594 F. Supp. 1353, 1360 (D. Md. 1984). Said another way, "statutory retroactivity is a necessary predicate for the applicability of the Contract Clause." Id., citing
United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 18, 97 S. Ct. 1505, 1516, 431 L. Ed. 2d 92 (1977). Like the United States District Court, our research did not reveal a single United States Supreme Court decision invalidating a non-retroactive statute on the basis of the Contract Clause. Id.
As the Maryland District Court observed in Hughes, the United States Supreme Court "revitalized Contract Clause jurisprudence" by striking down state legislation in two cases, United States Trust Co., supra, and
Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 98 S. Ct. 2716, 57 L. Ed. 2d 727 (1978). Id. at 1358. In the former case, the U.S. Supreme Court set forth the analysis applicable for judicial review of cases involving alleged violations of the Contract Clause. First, the court must ascertain whether a contractual obligation was created by a statute. Id. at 1359, citing United States Trust Co., supra, 431 U.S. at 17, 97 S. Ct. at 1515. Second, the court must determine whether the State's actions, i.e., the amendment or repeal, impaired the contractual obligation assumed by the state. Id., citing United States Trust Co., supra, 431 U.S. at 19-21, 97 S. Ct. at 1516-1517. Given the intent of the General Assembly as expressed by the unambiguous language of KRS 61.692 and KRS 61.637(7)(a), it is our opinion that both of those questions would be answered in the affirmative. However, the analysis does not end there.
Not every impairment by a state of its own contractual obligations is prohibited by the Contract Clause. A constitutional prohibition against impairing the obligation of contracts "is not an absolute one to be read with literal exactness." City of Florence, supra, at 881;
Morgan v. Natural Resources and Environmental Protection Cabinet, Ky., 6 S.W.3d 833 (1999). Upon determining that an existing contract has been substantially impaired by subsequent legislative action, the third question that a reviewing court must answer is whether the challenged legislation is "reasonable and necessary to serve a legitimate or important public purpose." Hughes, supra, at 1360, citing United States Trust Co., supra, 431 U.S. at 26, 97 S. Ct. at 1519. In exercising its police power, a state may constitutionally impair the contractual obligations and rights imposed by its own contract subject to this qualification. Id., citing United States Trust Co., supra, 431 U.S. at 21-26, 97 S. Ct. at 1517-1520. "Legislation enacted under police power is not invalid merely because of its incidental effect." City of Florence, supra, at 881; Morgan, supra. In this instance, "the broad term police power is concerned with the public health and the general welfare of the community." City of Covington, supra, at 888; Morgan, supra. Only upon a determination that the contract between KERS members and the state would be substantially impaired, then, would a court need to decide whether the proposed legislation could properly be characterized as "reasonable and necessary" in the relevant sense. Jones, supra, at 716.
Where a state's own contract is involved, as is the case here, "'complete deference to the legislative assessment of reasonableness and necessity [by a reviewing court] is not appropriate because the State's self-interest is at stake." Hughes, supra, at 1361, citing United States Trust Co., supra, 431 U.S. at 26, 97 S. Ct. at 1519. In making this determination, the level of scrutiny to which the legislation will be subjected is directly proportional to the severity of the impairment which must be "substantial" to involve the Contract Clause. Id., citing
Energy Group v. Kansas Power & Light, 459 U.S. 400, 103 S. Ct. 697, 74 L. Ed. 2d 569 (1983). The legitimate expectations of the contracting parties must be examined in order to determine whether the impairment is "substantial" and assess the level of severity. Id., citing United States Trust Co., supra, 431 U.S. at 19-20, 97 S. Ct. at 1516-1517. Total destruction of contractual expectations is not required for a finding of substantial impairment. Id., citing United States Trust Co., supra, 431 U.S. at 411, 97 S. Ct. at 1519-1520.
Because neither the precise language nor the specific purpose of the proposed retrospective legislation has been articulated, assessing the substantiality of the impairment would be premature at this juncture. However, we can offer the following insight regarding the factors that a court must consider in making such an assessment. While "no hard and fast rule exists" requiring strict scrutiny of all legislative actions said to constitute an impairment of a state's own contract, Jones seems to require reviewing courts to engage in a "more strict examination than usual" of the facts underlying legislative assessments of reasonableness and necessity due to the inherent possibility of bias. Id., citing United States Trust Co., supra, 431 U.S. at 26, 97 S. Ct. at 1519. Reasonableness is to be judged in light of whether the existing contractual obligations of the state "'had effects that were unforeseen and unintended by the legislature'" at the time the contract creating those obligations and rights was created. Id. at 1362, citing United States Trust Co., supra, 431 U.S. at 31, 97 S. Ct. at 1522. Necessity, on the other hand, is to be judged on two levels: 1) whether a less drastic modification could have been implemented; and 2) whether the state could have achieved its goals without modification. Id., citing United States Trust Co., supra, 431 U.S. at 29-30, 97 S. Ct. at 1521-1522.
In assessing the constitutionality of retrospective legislation, a court is guided by the following general principles. A retrospective law is "one which takes away or impairs vested rights acquired under existing laws, or which creates a new obligation or imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past."
Benson's Inc. v. Fields, Ky., 941 S.W.2d 473, 475 (1997). According to Kentucky's highest Court, "retrospective statutes have ever been regarded as impolitic and unwise, as they are, in general, unjust and oppressive." Hedger, supra, at 232. Despite often being impolitic and unjust, however, retrospective legislation is "not, merely as such, unconstitutional" and the judiciary is bound by it absent an "effect forbidden by the fundamental law."
Thornton v. McGrath, 62 Ky. 344, 348, 1 Duv. 350, 354 (1864). The Contract Clause "does not prohibit the States from repealing or amending statutes generally, or from enacting legislation with retroactive effects." United States Trust Co., supra, 431 U.S. at 17, 97 S. Ct. 1515. Although such statutes have been deemed constitutionally valid, "they have always been subjected to such a construction as would circumscribe their operation within the narrowest possible limits consistent with the manifest intention of the legislature, to be drawn from the language used." Hedger, supra, at 232.
Statutes impairing the obligation of contracts are expressly forbidden by the constitution; a retroactive statute may also be "constructively unconstitutional" if it interferes with vested rights. Id. In other words, retrospective legislation that impairs or invalidates the obligations of a contract or interferes with vested rights, "effects forbidden by the fundamental law," is unconstitutional. Id.;
Kentucky Utilities Co. v. Carlisle Ice Co., 279 Ky. 585, 131 S.W.2d 499, 504 (1939). "A legislative act will not be permitted, even if an attempt to do so is disclosed, to operate retrospectively" where either of these unconstitutional consequences will follow. Kentucky Utilities Co., supra, at 504.
For constitutional purposes, "change" and "impairment" are equivalent terms. Adam, supra, at 762. Elaborating upon the concept of impairment, the Court has said:
Any law which changes the intention and legal effect of the original parties, giving to one greater or the other a less interest or benefit in the contract, impairs its obligation. The extent of the change is immaterial. Any deviation from its terms *** imposing conditions not included in the contract, or dispensing with the performance of those that are included, however small and unimportant they may appear to be in their effect, impairs the obligation of a contract. *** The Legislature may regulate the remedy and the methods of procedure under a past as well as a future contract, but it cannot impose new restrictions upon the enforcement of a past contract, so as to materially lessen its value and benefit to either party.
Kentucky Utilities Co., supra, at 504 (citation omitted). Contractual obligations are impaired by a law which "renders them invalid, or releases or extinguishes them" and impairment has been predicated upon laws which, without destroying contracts, "derogate from substantial contractual rights." City of Covington, supra, at 888 (citation omitted).
While it is well-established that a state cannot "by either constitutional provision or legislative enactment impair the obligations of a contract,"
Commonwealth v. German Insurance Co., 141 Ky. 606, 133 S.W. 793, 795 (1911), an exception to this general rule is that "the state cannot contract away its police power or its right to abrogate or annul contracts it has made in contravention of this power." Id. As in Hughes, the contract in question deals with the level of compensation to be paid to state employees in exchange for the services performed in the course of their employment. "Such a contract is not one as to which one legislature can bind subsequent legislatures for work and services to be performed" by state employees in the future. Hughes, supra, at 1362. While a state may change the salary or the mode of compensation pursuant to its police power, the employee "must have available substantially the program he bargained for and any diminution thereof must be balanced by other benefits or justified by countervailing equities for the public's welfare." Id. (Citation omitted); OAG 90-6, p. 7, citing 60 Am. Jur.2d Pension and Retirement Funds, sec. 1623.
Much like KRS 61.692, the 1984 Pension Reform Act being challenged in Hughes specifically indicated that pension benefits which had already vested and were being paid on the effective date of the legislation would not be modified or changed. Id. at 1363. In contrast with the invalid statute involved in United States Trust Co. , the 1984 Act did not retroactively deprive the plaintiff class of benefits or rights for which they had bargained. Id. Because the impairment was not drastic and a more moderate course of action did not clearly evidence itself, the District Court deferred to the judgment of the legislature with the implication being that a "total repeal" might not pass constitutional muster. Id. at 1371. Of particular significance here, the Court emphasized that the state was not empowered to withdraw retroactively the pro rata pension benefits that had accrued, but could prospectively modify the amount of benefits. Id. at 1364 (citation omitted).
In United Firefighters of Los Angeles City, supra, the Court of Appeals was confronted with the question of whether a city charter amendment that placed a 3% cap on police and firefighter pension benefit cost of living adjustments was unconstitutional as applied to police and firefighters hired prior to enactment of the amendment. Holding that the amendment unconstitutionally impaired the vested contractual rights of the plaintiffs, the Court observed that "'it is advantage or disadvantage to the particular employees whose own contractual pension rights, already earned, are involved which are the criteria by which modifications to pension plans must be measured.'" Id. at 1103 (citation omitted). Under California law, public employees acquire "'a vested right to a pension based on the system then in effect'" upon accepting public employment. Id. (Citation omitted). Public employees also acquire a vested right to additional pension benefits thereafter conferred during their employment. Id. Said another way, public employees have a vested right "not only to benefits substantially similar to those in effect when they accepted public employment, " but also to benefits subsequently offered by the public employer during their term of service. Id. 1107 (citations omitted). While the terms of public employment which ripen into obligations protected by the Contract Clause only upon an employee's actual performance are otherwise a matter of statute, deferred compensation in the form of pension rights has the status of a contractual obligation "from the moment one accepts public employment. " Id. at 1105. As the contractual relationship at issue had previously been modified, the Court determined that the reasonable expectations of the plaintiffs had to be measured as of that date. Likewise, the reasonable expectations of members whose rights would be affected by the proposed legislation would be measured as of the date that the "double dipping" provision was enacted.
As previously acknowledged, "total destruction of contractual expectations" is not required for a finding of substantial impairment. Id. at 1109 (Citation omitted). Further, a "state regulation [or statute] that restricts a party to gains it reasonably expected from the contract does not necessarily constitute a substantial impairment. " Id., citing United States Trust Co., supra, 431 U.S. at 31, 97 S. Ct. at 1522. If the regulation [or statute] constitutes a substantial impairment, the state must have a "significant and legitimate [or reasonable and necessary] public purpose" such as the "remedying of a broad and general social or economic problem" to justify its action. Id. (Citations omitted). Such a requirement ensures that the state is exercising its police power, "rather than providing a benefit to special interests. " Id. at 1110. However, the U.S. Supreme Court has clarified that the public purpose "need not be addressed to an emergency or temporary situation." Id. at 1109, citing United States Trust Co., supra, 431 U.S. at 22, 97 S. Ct. at 1518. "Unless the State itself is a contracting party," as is customarily true in cases involving economic and social regulation, courts properly defer to legislative judgment as to the necessity and reasonableness of a specific measure. Id. (Original emphasis).
Because the Contract Clause would be rendered meaningless if a state could "reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose," such a purpose, standing alone, is not necessarily enough to justify a substantial contractual impairment. Id., citing United States Trust Co., supra, 431 U.S. at 26, 97 S. Ct. at 1519. To avoid this inherent potential for misuse, the measure must also be "necessary" which, in turn, requires an evaluation of whether a less drastic modification of the contractual obligation or measures involving no modification would have permitted the governmental entity to meet its goals. Id. A state is not completely free to consider impairing the obligations of its own contracts "'on a par with other policy alternatives,'" nor is a state permitted to impose a drastic impairment when "'an evident and more moderate course'" would be equally effective in accomplishing the cited objective. Id. at 1111, citing United States Trust Co., supra, 431 U.S. at 30-31, 97 S. Ct. at 1522. Further, a change in circumstances does not justify a substantial impairment unless it was "unforeseen and unforeseeable." Id. "Only the minimal impairment necessary to attain the governmental entity's proposed legitimate end may be visited upon parties to contracts." Id.
If a change in the law works a "severe, permanent and immediate change" in contractual rights as retrospective legislation of the type proposed would, an assessment of its constitutionality requires careful scrutiny of its nature and purpose. Id. (Citation omitted). In such an instance, the impairment requires a "compelling state interest" as well as necessity. Id. By definition, neither a retroactive amendment nor a repeal, if applied to current members of Kentucky Retirement Systems, could properly be characterized as the least drastic alternative available nor could the resulting impairment be accurately described as "minimal." Accordingly, it is our opinion that the ends would probably not justify the means in this context as the presumably fiscal motivation for the proposed legislation does not satisfy this intentionally high standard. It is an established principle that a desire to reduce costs or limit public spending "does not justify the abrogation or impairment of a public entity's contractual obligations notwithstanding the legitimacy of such a public purpose." Id. at 1112, citing
Lynch v. United States, 292 U.S. 571, 580, 54 S. Ct. 840, 844, 78 L. Ed. 1434 (1934). A public entity "cannot justify the impairment of its contractual obligations on the basis of the existence of a fiscal crisis created by its own voluntary conduct." Id. (Citation omitted). Where an enactment appears to be somewhat narrowly tailored to modify a particular contractual obligation as opposed to being part of a broad public program which incidentally has the effect of impairing a specific contract, it fails the test. Id. at 1115. Such is the case here.
Our opinion today is consistent with OAG 94-28, in which we addressed the question presented, albeit in a slightly different context. At issue in OAG 94-28 was whether a newly enacted statutory provision mandating forfeiture of benefits acquired under the Legislative Retirement Plan upon the occurrence of specified events could be applied to a current legislator or former legislator who joined the plan on or after the effective date of the enactment. More specifically, OAG 94-28 was prompted by a request for an opinion regarding "whether KRS 6.696 is applicable to a legislator who was a member of the [LRP] on or prior to September 16, 1993." Id. , p. 2. Observing that KRS 6.525 expressly adopts KRS 21.480 (a provision of the Judicial Retirement Plan), we observed that the LRP is, "from a legal perspective, a contract." Id. Because KRS 6.696 "obviously involves a 'reduction or impairment by alteration, amendment or repeal' as that phrase is used in KRS 21.480," by adding to the circumstances under which a legislator's retirement benefits may be forfeited, we concluded that such a change would violate both the Contract Clause and Section 19 if applied to a legislator who was a member of the LRP prior to the effective date of KRS 6.696. Id.
"Obviously, provisions (e.g., KRS 6.696) attempting to ensure the integrity of state legislators involve an important public interest." Id. , p. 3. As the sanctions provided for in KRS 6.696 were in addition to previously existing ones, however, we did not believe that the interest served by retrospective application of KRS 6.696 was sufficient to justify overriding the prohibition against impairment of contracts found in both the state and federal constitutions. Accordingly, we determined that KRS 6.696 could only be applied to a legislator who became a member of the LRP on or after the effective date of its enactment, "so that the provision would be considered part of the retirement plan of a legislator in keeping with KRS 21.480 as adopted by KRS 6.525." We believe this reasoning is equally applicable in the present context.
A review of KRS 21.580(1)(b), KRS 6.521(2), KRS 21.405(4), and KRS 61.702(8) further substantiates our position. In contrast to KRS 61.692, each of the aforementioned provisions specify that the benefits provided therein "shall not be considered as benefits protected by the [relevant] inviolable contract provisions." (Emphasis added). Noticeably absent from KRS 61.692 is this exclusionary language. With the exception of KRS 21.580, the General Assembly also explicitly reserved the right to suspend or reduce the benefits conferred in each subsection if in its judgment "the welfare of the Commonwealth so demands." An intention will not be imputed to the General Assembly "in the absence of language clearly designed to have that effect."
City of Louisville v. Louisville Seed Co., Ky., 433 S.W.2d 638, 642 (1968), overruled on other grounds by
Gas Service Co., Inc. v. City of London, Ky., 687 S.W.2d 144 (1985). If the General Assembly had intended for benefits earned pursuant to KRS 61.637(7)(a) not to be considered as benefits protected by KRS 61.692, it would have included language to the effect. Likewise, if the General Assembly had intended to reserve the right to suspend or reduce the benefits conferred by KRS 61.637(7)(a), it would have expressed that intention just as it did in KRS 21.580(1)(b). In determining legislative intent, we are not "'at liberty to add or subtract from the legislative enactment nor discover meaning not reasonably ascertainable from the language used [in the statute].'" Stogner, supra, at 834. (Citation omitted).
Because legislation designed to prohibit the practice of "double dipping" would necessarily involve a "reduction or impairment by alteration, amendment or repeal, " of the benefits provided for by the "inviolable contract" of the Commonwealth created by KRS 16.510 to 16.645, retrospective application of such legislation would constitute a violation of both the Contract Clause and Section 19. In our view, this result is dictated by both logic and precedent. "It is fair, conscionable and constitutional to afford prospective application to [the subject legislation] rather than retroactive application." City of Florence, supra, at 883. Based on the foregoing, it is our opinion that the General Assembly can only prohibit the practice of "double dipping" on a prospective basis.