Can Maryland cut future pension benefits for state employees and teachers without violating the constitutional ban on impairing contracts?

Plain-English summary

Two state senators asked the Attorney General whether Senate Bill 606, a 1983 proposal that would have reduced future benefits under the State Employees' Retirement System and the Teachers' Retirement System, would have violated the U.S. Constitution's Contract Clause, which bars a state from passing any law "impairing the Obligation of Contracts." The opinion concluded that the retirement statutes did form a contract between the State and its employees, but that this contract implicitly permitted reasonable modifications needed to keep the systems financially flexible and sound, so a bill like Senate Bill 606 would not have impaired that contract if the reductions were, in fact, needed for that purpose. The opinion went further: even under a stricter reading of the statutes that flatly barred any benefit reduction, the proposed changes would still likely have survived a Contract Clause challenge under the U.S. Supreme Court's test in United States Trust Co. v. New Jersey, because the modifications were reasonable, included a new offsetting benefit (lower employee contributions), and were tied to the long-term financial health of the systems rather than to unrelated government priorities. The opinion's central caution was that courts examine a state's own contract impairments closely, so any legislation reducing pension benefits needed an explicit, well-documented factual basis, not just conclusory assertions that a cut was necessary.

Currency note

This opinion was issued in 1983. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Senate Bill 606 itself was not enacted, but the opinion's own closing editor's note records that the General Assembly enacted Chapter 7 (H.B. 991), Laws of Maryland 1984, to alter retirement system membership conditions, and that the resulting pension reform legislation was upheld against a Contract Clause challenge in Maryland Teachers Ass'n v. Hughes, 594 F. Supp. 1353 (D. Md. 1984). Maryland's retirement and pension statutes, originally in Article 73B, have since been recodified into the State Personnel and Pensions Article, and the reasonable-modification framework this opinion applied has been shaped by decades of subsequent Contract Clause case law. Verify the current State Personnel and Pensions Article and current Contract Clause precedent before relying on any specific description of the State's authority to modify pension benefits.

Common questions

Can a state legislature reduce pension benefits for current government employees without violating the Constitution?
According to this opinion, yes, if the reduction is reasonable and necessary to keep the pension system financially sound, and the legislature documents a real factual basis for the change rather than relying on unsupported assertions.

Did Maryland law guarantee that state employees' and teachers' pension benefits could never be reduced?
No, the opinion concluded. It found that provisions of Article 73B calling certain benefits a "condition of employment contract" were enacted with the understanding, drawn from the legislative history, that the General Assembly retained the power to make reasonable modifications to keep the retirement systems flexible and solvent.

What made a pension benefit cut "reasonable and necessary" under the Contract Clause, according to this opinion?
The opinion looked to whether the modification bore a real relationship to the system's financial soundness, whether less drastic alternatives were considered and rejected, and whether the change was offset by some new advantage to employees, such as the reduced employee contributions included in Senate Bill 606.

Why did the opinion say courts would scrutinize a pension cut more closely than an ordinary business regulation?
Because the State itself was a party to the contract being modified and stood to benefit financially from the change, the opinion explained that courts give less deference to the legislature's own assessment of necessity than they would to a law regulating private contracts between other parties.

Background and statutory framework

The opinion analyzed two provisions common to the Employees' and Teachers' Retirement Systems, Article 73B, §§3(9) and 83(9), which stated that a member who remained in the retirement system (rather than switching to the newer Pension System created in 1980) would keep, "as a condition of that person's employment contract," the benefits in place as of December 31, 1979. Applying the three-part Contract Clause framework from United States Trust Co. v. New Jersey and Robert T. Foley Co. v. Washington Suburban Sanitary Comm'n, the opinion first found that this statutory language did create a contract, consistent with the Office's own 1976 opinion (61 Opinions of the Attorney General 746) recognizing that the General Assembly had "consistently treated members of the state systems as if they had a contract with the state." It then traced the 1979 legislative history of the "guarantee clause" amendment, including a February 22, 1979 letter of advice from the Office to then-Senate Finance Committee Chairman Steinberg, concluding that the clause was adopted with the shared understanding that it permitted reasonable modification of benefits "for the purpose of keeping the pension system flexible and maintaining its integrity," language drawn from the Office's 1976 opinion and echoed by the Court of Special Appeals in City of Frederick v. Quinn, 35 Md. App. 626 (1977), and later by a federal court in Baker v. Baltimore County, 487 F.Supp. 461 (D. Md. 1980).

Even assuming a stricter reading of the guarantee clauses that barred any reduction outright, the opinion applied the U.S. Supreme Court's United States Trust Co. v. New Jersey framework, under which a state's impairment of its own financial obligations must be both necessary (no more drastic than required, with no equally effective and less drastic alternative available) and reasonable (justified by circumstances, including changed circumstances not anticipated when the contract terms were adopted). The opinion distinguished United States Trust, where New Jersey repealed a bondholder-protective covenant for purposes unrelated to bondholders' own interests, from Senate Bill 606, where any benefit reduction would serve the long-term interests of the same employees affected, who also had an interest in the jobs and salary levels that excessive pension costs might threaten, and where the bill included an offsetting new benefit (lower required employee contributions). The opinion's bottom-line caution was procedural rather than substantive: whatever the ultimate justification for a benefit reduction, the General Assembly needed to set out the factual basis explicitly and document it well, since courts reviewing a state's impairment of its own contracts do not simply defer to the legislature's self-interested assessment of necessity.

Citations

Statutes:

• Article 73B, §2 of the Maryland Code (Employees' Retirement System)
• Article 73B, §82 of the Maryland Code (Teachers' Retirement System)
• Article 73B, §112 of the Maryland Code (Pension System for Employees)
• Article 73B, §141 of the Maryland Code (Pension System for Teachers)
• Article 73B, §§113(1) and 142(1) (membership rules for employees/teachers hired after Jan. 1, 1980)
• Article 73B, §§113(2) and 142(2) (option to remain in retirement system vs. switch to pension system)
• Article 73B, §3(9) (Employees' Retirement System "guarantee clause")
• Article 73B, §83(9) (Teachers' Retirement System "guarantee clause")
• Article 73B, §§14(4) and 89(4) (annual budget bill funding requirement)
• Article I, §10, clause 1 of the United States Constitution (Contract Clause)
• Chapter 23, Laws of Maryland 1979 (enactment of the guarantee clause amendment)

Cases:

• State v. Fisher, 204 Md. 307, 315 (1954)
• Energy Reserves Group, Inc. v. Kansas Power and Light Co., 459 U.S. 400 (1983)
• Home Building and Loan Assn. v. Blaisdell, 290 U.S. 398, 434 (1934)
• United States Trust Co. v. New Jersey, 431 U.S. 1 (1977)
• City of El Paso v. Simmons, 379 U.S. 497, 506-507 (1965)
• Robert T. Foley Co. v. Washington Suburban Sanitary Comm'n, 283 Md. 140, 151-52 (1978)
• Baker v. Baltimore County, 487 F.Supp. 461, 473 n. 18 (D. Md. 1980), aff'd mem., 660 F.2d 488 (4th Cir. 1981)
• Grand Lodge v. City of New Orleans, 166 U.S. 146 (1897)
• Illinois Cent. R. R. Co. v. City of Decatur, 147 U.S. 190, 201 (1893)
• City of Frederick v. Quinn, 35 Md. App. 626 (1977)
• North Charles General Hosp. v. Employment Security Admin., 286 Md. 115, 118 (1979)
• Public Service Comm'n v. Sun Cab Co., 160 Md. 476, 481 (1931)
• Baltimore Retail Liquor Package Stores Ass'n v. Board of License Comm'rs, 171 Md. 426, 430 (1937)
• Holy Cross Hospital v. Health Services Cost Review Comm'n, 283 Md. 677, 686 (1978)
• Isserlis v. Director of Public Works, 300 A.2d 273, 275 (R.I. 1973)
• Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 n. 15 (1978)
• Pineman v. Oechslin, 494 F.Supp. 525 (D. Conn. 1980), vacated, 637 F.2d 601 (2d Cir. 1981)
• Valdes v. Cory, 189 Cal. Rptr. 212, 226 (Cal. App. 1983)
• Singer v. City of Topeka, 607 P.2d 467, 476 (Kan. 1980)
• Halpin v. Nebraska State Patrolmen's Retirement System, 320 N.W.2d 910, 915 (Neb. 1982)
• Maryland Teachers Ass'n v. Hughes, 594 F. Supp. 1353 (D. Md. 1984)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1983/Volume68_1983.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

RETIREMENT SYSTEMS

Constitutional Law—Contract Clause—Pension "Guarantee Clause"—Proposed Changes in Benefits Not Necessarily Unconstitutional Impairment—Factual Basis Needed for Changes.

September 27, 1983

The Honorable Rosalie S. Abrams
The Honorable Howard A. Denis
Senate of Maryland

You have requested our opinion as to the constitutionality of legislation that would reduce, in certain respects, future benefits available to members of the State Employees' Retirement System and the Teachers' Retirement System. Specifically, you asked us whether Senate Bill 606, considered but not enacted during the 1983 Regular Session of the General Assembly, would have violated the clause in the United States Constitution that prohibits a state from "impairing the Obligation of Contracts".

For the reasons stated below, we conclude as follows:

1. Current law governing the benefit structure of the State Employees' Retirement System and the Teachers' Retirement System does not absolutely prohibit any reduction in benefits. Rather, that law, even though embodying a contract between the members of the retirement systems and the State, implicitly permits reasonable modification of benefits, if those modifications are found by the General Assembly to be appropriate to maintain the financial flexibility and integrity of the retirement systems. If, in fact, the modifications contained in Senate Bill 606 are found to be needed for this objective, those modifications would be consistent with current law. Therefore, a bill such as Senate Bill 606 would not constitute any impairment of the contract that the law creates.

2. Even if the current law is construed as flatly precluding any reduction in benefits whatsoever, no matter what the reason, nevertheless the modifications in benefits contained in Senate Bill 606 would not be an unconstitutional impairment of a contract, assuming that a sound factual basis supported the need for such legislation.

We emphasize, however, that an impairment of the State's contractual obligation would be sustainable in court only if, in fact, it was both necessary and reasonable. Mere conclusory assertions will likely not survive the stringent judicial scrutiny that is given such impairments. Therefore, the factual basis that underlies any legislative reduction of benefits should be set out explicitly and should be well documented.

I
Background

Senate Bill 606 would have made the following changes to the State Employees' Retirement System and the Teachers' Retirement System:

1. For years of creditable service after July 1, 1983 (the proposed effective date of Senate Bill 606), a member's retirement, early retirement, ordinary and accidental disability allowances, and cost of living adjustments would be computed in the same fashion as for members of the Employees' and Teachers' Pension Systems.1 This new method of determining benefits would result in a lower level of benefits than now provided by the law governing the systems.

2. For years of creditable service occurring before July 1, 1983, these benefits would be computed under the more remunerative scheme that is presently in effect.

1 Article 73B of the Maryland Code provides for the establishment of four separate systems: (1) the Employees' Retirement System [§2]; (2) the Teachers' Retirement System [§82]; (3) the Pension System for Employees [§112]; and (4) the Pension System for Teachers [§141]. In general, employees or teachers who entered service on or after January 1, 1980, the date on which the two pension systems were established, are members of the respective pension systems only. See Article 73B, §§113(1) and 142(1). Previously employed employees or teachers who were members of the respective retirement systems on December 31, 1979 have the option of switching to the appropriate pension system or remaining in their retirement system. See Article 73B, §§113(2) and 142(2).

3. After July 1, 1983, members of the Employees' and Teachers' Retirement Systems would no longer be required to contribute 5% of their salaries to fund their plans, except to the extent that their salaries exceeded the Social Security tax wage base.

This bill was not enacted. However, the question of whether changes ought to be made in the retirement systems remains under consideration. By Executive Order 01.01.1983.10 (May 12, 1983), the Governor created a Joint Legislative and Executive Committee on Pensions to "analyze both the projected costs and expenses associated with the present retirement and pension systems" and make appropriate recommendations. 10:12 Md. Reg. 1037 (June 10, 1983). In addition, the Board of Trustees of the State Retirement Systems has engaged actuaries to evaluate the status of the systems and the need for change.

This Opinion is intended to provide a legal framework for such action by the General Assembly as may be thought necessary in light of these studies. Although we have focused on Senate Bill 606, as you suggested, the principles underlying our analysis of that bill would apply as well to comparable future legislation.

II
The Contract Clause Limitation

As a general rule, the General Assembly is free to modify any statute, even one that creates contractual obligations. "[O]ne legislature cannot prohibit [the] repeal or modification [of an act] by its successors, even where it purports to do so." State v. Fisher, 204 Md. 307, 315 (1954). Therefore, the General Assembly would be precluded from modifying the statute that governs the retirement systems only if (i) the statute creates a contract, (ii) the statute contains an explicit or implicit promise by the State that it will not make unilateral changes in the contract thereby created, and (iii) any changes made despite that promise amount to an unconstitutional impairment of the contract.

The constitutional limit on legislative modification of a contract is found in Article I, §10, clause 1 of the United States Constitution: "No State shall . . . pass any . . . Law impairing the Obligation of Contracts". Although the language of the Contract Clause is "facially absolute", the Supreme Court has said that this prohibition "must be accommodated to the inherent police power of the state 'to safeguard the vital interests of its people'". Energy Reserves Group, Inc. v. Kansas Power and Light Co., 459 U.S. 400, [103 S.Ct. 697, 704] (1983) (quoting Home Building and Loan Assn. v. Blaisdell, 290 U.S. 398, 434 (1934)).2

According to the Court of Appeals of Maryland:

"Consideration of a claim that particular governmental action invalidly impairs contractual obligations involves several steps. See United States Trust Co. v. New Jersey, 431 U.S. 1, 17-21, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). First, it must be determined whether a contract existed. If that hurdle is successfully cleared by the claimant, a court next must decide whether an obligation under that contract was changed. Finally, if the second question is answered in the affirmative, the issue becomes whether the change unconstitutionally impairs the contract obligation, '[f]or it is not every modification of a contractual promise that impairs the obligation of contract under federal law ... .' City of El Paso v. Simmons, 379 U.S. 497, 506-507, 85 S.Ct. 577, 582-583, 13 L.Ed.2d 446 (1965)." Robert T. Foley Co. v. Washington Suburban Sanitary Comm'n, 283 Md. 140, 151-52 (1978).

We examine each of these elements in turn.

2 The Supreme Court has drawn a distinction between a contract impairment premised on a state's exercise of the police power over private arrangements and an impairment of a state's own financial obligations, the latter facing more stringent examination under the Contract Clause. Compare Energy Reserves Group, Inc. v. Kansas Power and Light Co., 459 U.S. 400 (1983), with United States Trust Co. v. New Jersey, 431 U.S. 1 (1977). But, even in the latter case, the Contract Clause does not stand as an absolute bar to a legislature's ability to alter a state's own contracts if the justification for the impairment is sufficiently strong. See United States Trust Co. v. New Jersey, 431 U.S. at 15. Thus, a state may impair its own financial obligations if the impairment "is reasonable and necessary to serve an important public purpose". Id. See Part V A below.

III
Existence of a Contract

The first question is whether the existing scheme of benefits and qualifications forms a contract between the State and its employees. The following language appears in both §3(9) and §83(9) of Article 73B and, therefore, is applicable to both the Employees' and Teachers' Retirement Systems:

"Any person who is a member of the retirement system, established by this subtitle, on December 31, 1979 and does not at any time elect to be a member of the Pension System . . . , shall, as a condition of that person's employment contract, be entitled to remain a member of the retirement system without change in the benefits provided in the retirement system as of December 31, 1979. Any person receiving benefits under the provisions of this subtitle on December 31, 1979 shall continue to receive the benefits as provided in the retirement system as of December 31, 1979. These benefits shall include but not be limited to: (a) The eligibility for service retirement upon completion of thirty years service or attainment of age 60; (b) The eligibility for a reduced service retirement upon completion of a certain length of service; (c) The service retirement allowance of one fifty-fifth of average final compensation; (d) The retirement allowance provided for ordinary or accidental disability; (e) The selection of options for service or disability allowances; (f) The adjustment of the retirement allowance for increases in the Consumer Price Index; (g) The death benefit; (h) The level of contributions from members; and (i) The length of service for members to vest benefits in the system."

There is little doubt that a statutory specification of the terms of an "employment contract" is itself part of that contract between the State and the affected employees. See generally United States Trust Co. v. New Jersey, 431 U.S. 1, 17 n. 14 (1977). As this Office observed even before the enactment of §§3(9) and 83(9), "the General Assembly has consistently treated members of the state systems as if they had a contract with the state". 61 Opinions of the Attorney General 746, 749 (1976). Thus, we next examine the nature of the contractual obligation, to determine whether that obligation is an unalterable commitment.3

3 A contract to which the State is a party by statute requires the same element of mutual consideration that must be present in a contract between private parties. See Grand Lodge v. City of New Orleans, 166 U.S. 146 (1897). See also Opinion 79-074 (December 14, 1979) (unpublished). Although, in the context of the "promise" made by §§3(9) and 83(9), there is difficulty in identifying any single form of consideration that could be said to apply to all employees, various forms of detrimental reliance by employees that amount to consideration in the legal sense may well have occurred. At the very least, some employees might have given up enough so that, on a case-by-case basis, sufficient consideration in the legal sense might be said to make the statute's reference to contract obligations a real one; and, for present purposes, we think that the existence of consideration on a broader basis should be presumed. See Illinois Cent. R. R. Co. v. City of Decatur, 147 U.S. 190, 201 (1893).

IV
Amendable Nature of the Contract

The language of §§3(9) and 83(9) certainly permits and, perhaps, encourages the argument that the State not only entered into a contract but, also, has explicitly bound itself not to alter any benefits of the retirement systems: a member of either system "shall, as a condition of that person's employment contract, be entitled to remain a member of the retirement system without change in the benefits provided in the retirement system as of December 31, 1979". (Emphasis added.) Cf. Baker v. Baltimore County, 487 F.Supp. 461, 473 n. 18 (D. Md. 1980), aff'd mem., 660 F.2d 488 (4th Cir. 1981) ("plaintiffs have pointed to no language to show that the Baltimore County Council intended to contract away its own power to amend the retirement statutes"). However, the history of §§3(9) and 83(9) suggests that the General Assembly did not intend these provisions to state an unalterable commitment.

During the 1978 Session of the General Assembly, a "guarantee clause" comparable to §§3(9) and 83(9) was recommended by the Maryland State Teachers' Association and proposed as an amendment to Senate Bill 453. However, no pension reform legislation was enacted that Session.

On February 6, 1979, then Senate Finance Committee Chairman Steinberg sought the Attorney General's advice on the meaning of that "guarantee clause". Letter from Melvin A. Steinberg, State Senator, to Stephen H. Sachs, Attorney General (February 6, 1979). Senator Steinberg indicated that he expected the same amendment to be proposed to then pending Senate Bill 394. Senator Steinberg's request for advice stated:

"Specifically, my inquiry to you is to seek your advice as to the legality of the portion of the amendment that states, 'Such benefits shall be considered as a condition of that person's employment contract.'. Does this provision preclude the State from later changing or altering the benefits in the existing system? Also, how does this provision relate to the cost-of-living adjustment provided retired members? Even with the amendment, could the cost-of-living adjustment later be reduced in a way that the reduction would only apply to members not retired at that time?"

A February 22, 1979 letter of advice to Senator Steinberg responded that the enactment of such a "guarantee clause" would not preclude the General Assembly from making future changes to the retirement systems. Letter from Robert A. Zarnoch, Assistant Attorney General, to Melvin A. Steinberg, State Senator (February 22, 1979). The letter relied on 61 Opinions of the Attorney General 746 (1976), which had concluded that vested pension rights could be legislatively modified "for the purpose of keeping the pension system flexible and maintaining its integrity". 61 Opinions of the Attorney General at 748. That modification, however, must "bear some material relationship to the theory of the pension system and its successful operation, and changes in a pension plan which result in disadvantages to employees should be accompanied by comparable new advantages". Id.

The letter also quoted at length from City of Frederick v. Quinn, 35 Md. App. 626 (1977), in which the Court of Special Appeals wrote as follows:

"The pension plan is not immutable and the government-employer need not keep its provisions precisely intact. As government grows in size and complexity and as more employees draw from the fund, changes must often be made to assure the soundness of the fund and permit its growth commensurate with its prospective needs. The contractual or vested rights of the employee in Maryland are subject to a reserved legislative power to make reasonable modifications in the plan, or indeed to modify benefits if there is a simultaneous offsetting new benefit or liberalized qualifying condition." 35 Md. App. at 630-31 (emphasis in original).

After reviewing these authorities, the February 22, 1979 letter of advice concluded that the proposed "guarantee clause" would be construed as conferring upon a State employee "a vested right to a pension".4 However, the letter went on to observe that:

"[T]his right to pension benefits could be subject to reasonable modification by the General Assembly for the purpose of keeping the system flexible and maintaining its integrity. And, as our 1976 opinion indicates, this rule would also apply to legislative changes affecting cost of living adjustments, regardless of when the employee retired."5

On March 2, 1979, the Senate Finance Committee voted 8-0 to adopt the "guarantee clause" amendment to Senate Bill 394 and to issue a favorable report on the bill. [1979 S. Journal at 1674.] The amended bill was then passed overwhelmingly by the Senate [1979 S. Journal at 1371] and by the House [1979 H. Journal at 2040]. Subsequently, the bill was signed into law by the Governor. Chapter 23, Laws of Maryland 1979.

4 The February 22, 1979 letter of advice incorrectly attributed to the prior Opinion of the Attorney General the view that this pension right vested "upon [the employee's] acceptance of employment". In fact, the Opinion rejected this view. 61 Opinions of the Attorney General at 752.

5 This summary of the relevant legal background, brought to the General Assembly's attention at the time §§3(9) and 83(9) were under consideration, was later echoed in Baker v. Baltimore County, 487 F.Supp. 461 (D. Md. 1980), aff'd mem., 660 F.2d 488 (4th Cir. 1981). In that case, Judge Kaufman summarized Maryland law as generally "permitting legislative modifications in a public employee pension plan if those modifications are reasonable and/or would tend to enhance the actuarial soundness of the plan". 487 F. Supp. at 472. For a fuller discussion of this case, see Part V B below.

This legislative history suggests that §§3(9) and 83(9) were enacted by the General Assembly with the specific understanding that the General Assembly was not contracting away its ability to modify the benefits of members of the retirement systems. That legislative intent should govern construction of the statutory language:

"The cardinal rule of statutory construction is to ascertain and effectuate the actual intent of the Legislature. In determining this legislative intent, a court must read the language of the statute in context and in relation to all of its provisions. In addition, it may consider the statute's legislative history and must consider its purpose." North Charles General Hosp. v. Employment Security Admin., 286 Md. 115, 118 (1979).

See also, e.g., Public Service Comm'n v. Sun Cab Co., 160 Md. 476, 481 (1931). But see, e.g., Baltimore Retail Liquor Package Stores Ass'n v. Board of License Comm'rs, 171 Md. 426, 430 (1937).

On balance, we are inclined to believe that §§3(9) and 83(9) contemplate and permit "reasonable modification ... for the purpose of keeping the system flexible and maintaining its integrity", the meaning ascribed in the February 22, 1979 letter of advice to the then-proposed "guarantee clause".6 Thus, if Senate Bill 606 would have effectuated only such "reasonable

6 Cf. Holy Cross Hospital v. Health Services Cost Review Comm'n, 283 Md. 677, 686 (1978) ("the view taken of a statute by administrative officials soon after its passage . . . should not be disregarded except for the strongest and most urgent reasons"). Here, the administrative construction is at least as sure a guide to the intent of the General Assembly, for it was received in the very course of consideration of the provision in question. See Isserlis v. Director of Public Works, 300 A.2d 273, 275 (R.I. 1973). Indeed, the enactment of the "guarantee clause" was presumably based on this advice about the provision's meaning.

modifications", it would not have changed the contractual obligation stated in §§3(9) and 83(9).

Senate Bill 606 itself contained no preamble or other statement of the problems that it was intended to address. However, we understand that the bill was urged as necessary to establish a pension scheme "that will guarantee solvency". Baltimore Sun, February 19, 1983, at 12A, col. 1. Such legislation was also said to be needed to avoid the "risk that the [retirement] system itself can go bankrupt in future years". Baltimore Sun, January 7, 1983, at 1A, col. I.7 Of course, we are unable to state whether these underlying factual premises are correct or not; if they are, then Senate Bill 606 would likely have been the kind of "reasonable modification", a change "made to assure the soundness of the fund and permit its growth commensurate with its prospective needs", contemplated by the General Assembly when it enacted §§3(9) and 83(9). City of Frederick v. Quinn, 35 Md. App. at 630.8

Moreover, we note that Senate Bill 606 would have substituted at least one new benefit, reduced employee contributions, for the loss of other benefits.9 In addition, the bill would have left unaffected the retirement allowances of those who retired before the measure's proposed effective date.

In sum, assuming the necessary factual predicate, we conclude that Senate Bill 606 embodied the kinds of changes in the retirement systems permitted by §§3(9) and 83(9). However, we acknowledge that this is a close question; we therefore shall consider the legal validity of Senate Bill 606 in light of the possible construction that §§3(9) and 83(9) permit no diminution of benefits whatever.

7 In the short run, at least, the systems cannot "go bankrupt", because the statute provides that "the amounts which will become due and payable during the year next following . . . shall be included in the [annual] budget bill". Article 73B, §§14(4) and 89(4). However, if these funding requirements became severe enough, the financial stability of the State itself, and, therefore, of the systems, would be threatened.

8 Perhaps other justifications could also be advanced for legislation like Senate Bill 606, for example, reducing benefits unintended and unforeseen at the time that the systems were first created, or correcting earlier actuarial miscalculations. See Baltimore Sun, January 9, 1983, at 4K, col. 1. For the reasons stated in Part V C below, we strongly advise that the factual justifications for any such legislation be set out explicitly.

9 See note 12 below.

V
Impairment under the Contract Clause

Even if Article 73B, §§3(9) and 83(9) are construed to embody a contract in which the State flatly obligated itself not to reduce any benefit, nevertheless Senate Bill 606 would not automatically be in violation of the Contract Clause. "[N]ot every modification of a contractual promise . . . impairs the obligation of contract under federal law ... ." City of El Paso v. Simmons, 379 U.S. 497, 506-07 (1965).

A. The United States Trust Criteria

The principles that determine when a state may modify its own contracts were announced by the United States Supreme Court in United States Trust Co. v. New Jersey, 431 U.S. 1 (1977). The case involved the retroactive repeal by the New Jersey Legislature of a statutory covenant that imposed certain restrictions on the use of toll revenues accrued by the Port Authority of New York and New Jersey. The restrictions in the covenant made the bonds issued by the Port Authority more secure. Repeal of the covenant was intended to allow Port Authority bridge and tunnel toll revenues to be used to subsidize mass transit.

The Supreme Court observed that: "The Contract Clause is not an absolute bar to subsequent modification of a State's own financial obligations. As with laws impairing the obligations of private contracts, an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose." 431 U.S. at 25.10

10 The Supreme Court has subsequently cited United States Trust for the proposition that "impairments of a state's own contracts would face more stringent examination under the Contract Clause than would laws regulating contractual relationships between private parties". Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 n. 15 (1978). This "more stringent examination" manifests itself in a harder look at the factual basis for the legislative judgment. See Part V C below.

New Jersey argued that repeal of the covenant was necessary to a plan "to discourage private automobile use by raising bridge and tunnel tolls and [using] the extra revenues from those tolls to subsidize improved commuter railroad service". 431 U.S. at 29. Energy conservation and environmental protection, said by the Supreme Court to be "admittedly important purposes" [id.], were thereby to be advanced.

However, the Supreme Court "reject[ed] this justification because the repeal was neither necessary to achievement of the plan nor reasonable in light of the circumstances". Id. Total repeal was not necessary, in the Supreme Court's view: "a less drastic modification" of the covenant or "alternative means" apart from any modification could have been adopted instead. 431 U.S. at 30.11 Nor was repeal of the covenant "reasonable in light of the surrounding circumstances": the Port Authority's possible role in providing mass transportation had been an issue for at least a half century, and yet "[i]t was with full knowledge of these concerns that the . . . covenant was adopted". Thus, the repeal could not be justified by changed circumstances. 431 U.S. at 31-32.

11 New Jersey argued that "choosing among these alternatives is a matter for legislative discretion". "But", the Supreme Court responded, "a State is not completely free to consider impairing the obligations of its own contracts on a par with other policy alternatives. Similarly, a State is not free to impose a drastic impairment when an evident and more moderate course would serve its purposes equally well." 431 U.S. at 30-31.

B. Criteria Applied to Senate Bill 606

Applying these touchstones of necessity and reasonableness, we believe that Senate Bill 606 would likely have survived constitutional scrutiny.

If, as the proponents of the measure contend, a reduction in some benefits is needed to protect the solvency of the retirement systems, and if no lesser reduction would achieve the required cost savings, then, in the words of the Supreme Court, no "evident and more moderate course would serve [the State's] purposes". 431 U.S. at 31. Moreover, if the retirement systems are in fact in financial trouble that was not anticipated when the "guarantee clauses" in §§3(9) and 83(9) were enacted, it would be "reasonable in light of the surrounding circumstances", that is, the changed circumstances, to reduce benefits correspondingly.

There is one additional, telling difference between the legislative repeal held invalid in United States Trust and the change in benefits proposed in Senate Bill 606. When New Jersey repealed its statutory covenant, it reduced the security of the bonds for purposes wholly unrelated to the interests of the bond-holders. As the Supreme Court said: "[A] State cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors." 431 U.S. at 29. But, here, the reduction in future benefits contemplated by Senate Bill 606 is related to the long-term interests of the future beneficiaries themselves. A significant justification proffered by proponents of the proposed changes is that, unless the changes are made to avert a serious future drain on State resources, the members of the systems face uncertainty and even a potential risk to the soundness of the systems. Moreover, these future beneficiaries, in their capacity as present employees, have a clear interest in the jobs and salary levels that would be threatened by excessive pension costs. These circumstances suggest that a court would view enactment of a measure like Senate Bill 606, if in fact so justified, as necessary and reasonable under the circumstances.12

12 Another distinction between Senate Bill 606 and New Jersey's repeal of its covenant is that Senate Bill 606 contained at least one direct, new benefit, reduced employee contributions. If reductions in some benefits would be offset by other, added benefits, the State in effect would be paying compensation for the reductions. "Contract rights are a form of property and may be taken for a public purpose provided that just compensation is paid." United States Trust Co. v. New Jersey, 431 U.S. at 19 n. 16.

This conclusion is supported by Baker v. Baltimore County, 487 F.Supp. 461 (D. Md. 1980), aff'd mem., 660 F.2d 488 (4th Cir. 1981). There, Baltimore County police officers challenged an ordinance that altered the retirement plan applicable to these officers. Judge Kaufman held: "[I]f the change constituted an impairment, it was a reasonable change and therefore a change which did not constitute a violation of the [officers'] rights under the Contract Clause". 487 F.Supp. at 475. In distinguishing United States Trust, Judge Kaufman noted that the change in the retirement plan was only partially an effort to save the County money:

"[The plan] was also modified in ways which benefited plaintiffs. In addition, the pension plan herein was not repealed, it was only altered: the modifications did not leave plaintiffs with nugatory pension contracts, but rather with sounder, albeit somewhat smaller, pensions." 487 F.Supp. at 473.

But see Pineman v. Oechslin, 494 F.Supp. 525 (D. Conn. 1980), vacated, 637 F.2d 601 (2d Cir. 1981) (increase in retirement age violates Contract Clause under United States Trust criteria).

C. Need for Factual Basis

We conclude by emphasizing that any substantial impairment of State pension obligations can be sustained against a Contract Clause challenge only if the legislation rests on a demonstrable factual basis. The courts will not simply presume that the General Assembly had such a basis: "[C]omplete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake". United States Trust Co. v. New Jersey, 431 U.S. at 26. See, e.g., Valdes v. Cory, 189 Cal. Rptr. 212, 226 (Cal. App. 1983) (there was "no evidence that the Legislature gave considered thought to the effect [that the change in pension system funding] might have on [the system], or the possibility of alternative, less drastic, means of accomplishing its goal"); Singer v. City of Topeka, 607 P.2d 467, 476 (Kan. 1980) ("there was no evidence that the City will not be able to meet its obligations in the future, no evidence that plaintiffs' pensions are in jeopardy, no evidence that plaintiffs would receive any benefit from an actuarially sound system which plaintiffs would not otherwise receive"); Halpin v. Nebraska State Patrolmen's Retirement System, 320 N.W.2d 910, 915 (Neb. 1982) ("there [was] no evidence from which it could be found that an 'important public purpose' or a 'vital state interest' demanded the [change in annuity calculation]").

If the General Assembly determines that a reduction in benefits is necessary and reasonable, we strongly recommend that the basis for this conclusion be set out in as explicit a way as possible.13 Conclusory recitals alone will likely not convince a court that is looking for a substantial/actual showing. Instead, a detailed, well documented explanation of the need for the legislation, and the lack of feasible alternatives, will be essential.

13 This basis might be stated in a preamble or in the legislative history, for example, in committee reports or study documents on which the General Assembly relied. See Part I above regarding studies now under way.

VI
Conclusion

In summary, it is our opinion that:

1. Current law governing the benefit structure of the State Employees' Retirement System and the Teachers' Retirement System does not absolutely prohibit any reduction in benefits. Rather, that law, even though embodying a contract between the members of the retirement systems and the State, implicitly permits reasonable modification of benefits, if those modifications are found by the General Assembly to be appropriate to maintain the financial flexibility and integrity of the retirement systems. If, in fact, the modifications contained in Senate Bill 606 are found to be needed for this objective, those modifications would be consistent with current law. Therefore, a bill such as Senate Bill 606 would not constitute any impairment of the contract that the law creates.

2. Even if the current law is construed as flatly precluding any reduction in benefits whatsoever, no matter what the reason, nevertheless the modifications in benefits contained in Senate Bill 606 would not be an unconstitutional impairment of a contract, assuming that a sound factual basis supports the need for such legislation.

We emphasize, however, that an impairment of the State's contractual obligation would be sustainable in court only if, in fact, it was both necessary and reasonable. Mere conclusory assertions will likely not survive the stringent judicial scrutiny that is given such impairments. Therefore, the factual basis that underlies any legislative reduction of benefits should be set out explicitly and should be well documented.

Stephen H. Sachs, Attorney General
Jack Schwartz, Assistant Counsel, Opinions and Advice
Robert A. Zarnoch, Assistant Attorney General
Avery Aisenstark, Chief Counsel, Opinions and Advice

Editor's Note: Since the issuance of this Opinion, the General Assembly enacted Chapter 7 (H.B. 991), Laws of Maryland 1984, for the purposes of, among other things, altering certain conditions of membership in the Employees' and Teachers' Retirement Systems and making other necessary changes in the pension laws. The constitutionality of this pension reform legislation was upheld in Maryland Teachers Ass'n v. Hughes, 594 F. Supp. 1353 (D. Md. 1984).