Were Maryland retiree health benefits vested like pensions, and did GASB 45 change the State's legal duties?
Apply this to your situation
This page answers the general question as of 2005. Ezel answers yours: what it means for your facts, under current Maryland law, with citations.
MD AG Opinion 90-195: Were retiree health benefits vested?
Plain-English summary
In 2005, two Maryland legislators asked whether the State had a legal obligation to continue retiree health benefits for current retirees, vested former employees, current employees, and future employees. They also asked whether those benefits were contractual like pensions, whether collective bargaining could change them, and whether Governmental Accounting Standards Board Statement 45 created new legal duties.
The Attorney General concluded that Maryland then had a statutory obligation to make health benefits and a partial subsidy available to certain retirees. The governing law did not, however, promise a fixed benefit or subsidy, use vesting language, or clearly express an intent to create an enforceable contract. The General Assembly therefore remained free to amend the retiree health program.
The opinion contrasted that structure with Maryland's pension statutes. Pension participation was a condition of employment, pension law referred expressly to vested benefits, the State guaranteed payment of pension allowances, and Maryland decisions treated public pensions as contractual. The retiree health statute instead left much of the benefit and subsidy design to annual administrative and budget decisions.
GASB 45 did not change that legal conclusion. The opinion described GASB as a private accounting standard setter without power to impose substantive benefit duties on Maryland. Statement 45 required accrual accounting and financial reporting for other post-employment benefits, but did not require a particular benefit level, financing method, or prefunding schedule.
The opinion said collective bargaining could address retiree health benefits, but a negotiated change could not override existing law by itself. A change that conflicted with statute required the General Assembly to amend the law, and related appropriations remained subject to the legislative budget process.
An irrevocable trust could affect the contract analysis. The opinion did not decide the issue without a concrete proposal, but said a trust dedicated to retiree health benefits, particularly one containing employee contributions, could support a stronger argument that the State had undertaken a contractual duty to use those funds for that purpose.
Currency note
This opinion was issued in 2005. 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.
What the opinion said for affected groups in 2005
State retirees and employees
The opinion treated access to retiree health benefits as a statutory benefit, not an unchangeable contract. Length of service affected the retiree's share of the available subsidy but did not, by itself, create a vested right to a fixed benefit level.
Legislators and budget officials
The General Assembly could amend the health-benefit statute. The Secretary of Budget and Management and the Governor had broad roles in designing benefits and proposing subsidy funding, subject to statutory limits and legislative budget authority.
Employee organizations
Retiree health benefits could be discussed in collective bargaining. A memorandum of understanding could change the State's legal obligation only when the General Assembly adopted any necessary statutory change and approved the relevant budget consequences.
Government accountants and financial officials
GASB 45 affected how the State measured and reported other post-employment benefit costs. The opinion said it did not itself require prefunding or turn retiree health benefits into pension-like contractual obligations.
Designers of retiree health trusts
The legal effect depended on the trust terms. The opinion identified irrevocability, dedication of assets to retiree health care, creditor protection, and employee contributions as facts that could strengthen an argument for a contractual undertaking.
Common questions
Did the opinion say Maryland retirees had no health-benefit rights at all?
No. It said the State had a statutory obligation under the law then in effect to make health benefits and a subsidy available to certain retirees. Its point was that the statute did not make those benefits vested contractual rights immune from later amendment.
Why were pensions treated differently?
The pension statutes used vesting language, identified benefit payments as State obligations, required advance funding, and had been treated by Maryland courts and Attorney General opinions as contractual. The retiree health law lacked those features.
Did years of service make the health subsidy vested?
No. The opinion said service years helped calculate a retiree's share of whatever subsidy was available, but did not establish a fixed benefit or subsidy level.
Did GASB 45 require Maryland to fund retiree health benefits like pensions?
No. The opinion said GASB 45 governed accounting and financial reporting. It did not mandate a benefit level, financing method, or payment of the annual required contribution.
Could a union contract guarantee retiree health benefits?
Only within Maryland's statutory structure. The opinion said bargaining could address the subject, but a term inconsistent with existing law required legislative change and related costs remained subject to the budget process.
Would an irrevocable trust create a binding obligation?
Possibly, depending on its terms. The opinion said a dedicated irrevocable trust, especially one containing employee contributions, could strengthen a contract claim, but it did not resolve the question without a specific proposal.
Background and legal framework
SPP §2-508 allowed certain retirees to enroll in the State Employee and Retiree Health and Welfare Benefits Program and tied the State subsidy to creditable service. The Secretary of Budget and Management administered the program and recommended annual funding. The opinion read this arrangement as a statutory program with substantial administrative and budget flexibility.
The Contract Clause analysis began with the presumption that legislation states public policy rather than creates a contract. Nat'l R. Passenger Corp. required clear evidence of legislative intent to bind the State. United States Trust Co. explained that even an established public contract could be modified in some circumstances, and Hughes applied a reasonableness and public-purpose analysis to Maryland pension reform.
Pension law supplied the contrast. SPP §21-302(a) called pension allowances and related funding duties obligations of the State. Maryland cases described pension benefits as contractual, subject in some situations to reasonable modifications that preserved the system or supplied comparable value.
The State collective bargaining law allowed negotiation over wages, hours, and other employment terms. Under SPP §3-502(c), an agreement inconsistent with current law could not take effect until the General Assembly amended the law.
The opinion described GASB 45 as an accounting standard for other post-employment benefits. It required an actuarial measure and accrual reporting of the employer's annual cost, but GASB's own implementation guidance said it did not require payment of that amount or any particular funding method.
Citations and references
Statutes and constitutional provision:
- SPP §2-508(b)(1), retiree participation in the health-benefit program
- SPP §2-508(c), subsidy tied to creditable service
- SPP §21-302(a), State pension obligations
- SPP §3-502(c), legislative action required for negotiated terms inconsistent with law
- SPP §34-101(i), transfer of trust assets if the subsidy ended under the law then in effect
- United States Constitution, Article I, §10, cl. 1, Contract Clause
Cases:
- Nat'l R. Passenger Corp. v. Atchison, Topeka & Santa Fe. R. Co., 470 U.S. 451, 465-66 (1985), presumption against statutory contracts
- United States Trust Co. v. New Jersey, 431 U.S. 1, 17 n.14 (1977), legislative intent to create contractual rights
- Maryland State Teachers Association, Inc. v. Hughes, 594 F.Supp. 1353, 1360-62 (D.Md. 1984), pension reform and the Contract Clause
- Davis v. City of Annapolis, 98 Md. App. 707, 715, 635 A.2d 36 (1994), contractual treatment of public pensions
- Board of Trustees of Employees' Retirement System v. Mayor and City Council of Baltimore City, 317 Md. 72, 100, 562 A.2d 720 (1989), municipal pension obligations
- City of Frederick v. Quinn, 35 Md.App. 626, 371 A.2d 724 (1977), reasonable modification of pension plans
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/2005/90oag195.pdf
Original opinion text
Gen. 195] 195
PUBLIC OFFICERS AND EMPLOYEES
B UDGETARY A DMINISTRATION – S TATUS OF R ETIREE H EALTH
C ARE B ENEFITS IN L IGHT OF THE G OVERNMENT
A CCOUNTING S TANDARDS B OARD S TATEMENT 45
December 16, 2005
The Honorable Edward J. Kasemeyer
Maryland Senate
The Honorable Mary-Dulany James
House of Delegates
You have asked for our opinion on several issues related to the
State’s funding of retiree health benefits. Your questions are
prompted by new standards recently adopted by the Government
Accounting Standards Board (“GASB”) that affect how a
government employer is to account for liabilities related to employee
benefits. In particular, GASB Statement 45 (“GASB 45”) requires
that a government employer accrue liabilities associated with the
employer’s commitment to retiree benefits and recognize them on its
balance sheet.
You have asked:
1. Does the State have a statutory, contractual, or other legal
obligation to provide or to continue to provide health benefits to any
of the following groups: current vested retirees receiving health
benefits; employees or former employees that have fully vested with
16 years of creditable service (deferred vested individuals); current
employees with less than 16 years of State service who may vest at
a later date; or future employees?
2. In terms of other states and local governments,
particularly with regard to other AAA bond-rated states, does any
relevant case law exist regarding the provision or alteration of retiree
health benefits, and if so, how are these cases distinguishable from
the situation in Maryland?
3. Are there any legal distinctions between the contractual
rights that exist for pension benefits and promised retiree health
196 [90 Op. Att’y
benefits? Specifically, does the fact that the health insurance benefit
accrues over the career of an employee similar to pension benefits
create a similar contractual right to those benefits? Because current
case law in Maryland indicates that the contractual right to pension
benefits accrues over the career of an employee, does the fact the
health insurance benefits accrue over the career of an employee
result in a similar contractual right to those benefits? Additionally,
since case law indicates that the contractual right to pension benefits
is created at the time the employee vests in the pension system, if
there is no contractual right to health insurance benefits, how is
vesting for pension benefits distinguished from vesting for retiree
health insurance benefits?
4. Can the State’s legal obligations regarding retiree health
care for any of the enumerated groups in question one be altered as
the result of a collective bargaining agreement entered into by the
Administration and employee representatives?
5. GASB Statement 45 will require the State to report
liabilities and obligations for retiree health care in the same way as
pension liability. Does GASB 45 create any legal obligation for the
State to treat promised retiree health benefits the same as promised
pension benefits? Additionally, GASB 45 strongly encourages
prefunding of retiree health liabilities in the same manner as
pensions are prefunded. If the State were to create a non-revocable
trust fund in response to the GASB 45 requirements, does this action
create any legal obligation to provide retiree health benefits to any
of the groups enumerated in the first question and if so, at the current
level or some other level? Does this change if the employees are
required to make a contribution towards retiree health care similar
to the employee pension contribution?
Our answers to your questions are explained below. In
summary, it is our opinion that:
1. The State currently has a statutory obligation to provide
health care benefits to certain retirees; however, the statute does not
create a contractual obligation and the General Assembly remains
free to amend the law that provides such benefits. Although the
General Assembly may choose to confer a vested right in retiree
health care benefits, it has not done so. Even a contractual right to
health care benefits would be subject to modification if reasonable
and necessary to serve an important public purpose.
Gen. 195] 197
2. With respect to other states that, like Maryland, enjoy the
highest credit rating from the bond rating agencies, we found no
relevant case law. There are cases in other states that have reached
various conclusions; some of those decisions recognize a contractual
obligation to provide health care benefits to retirees. However, those
cases are of limited value in construing Maryland law as they are
based on the particular state constitution, statute, collective
bargaining agreement, or other circumstances peculiar to the case.
3. In contrast to retiree health care benefits, pension benefits
are contractual in nature. The statutes creating the various
retirement systems explicitly vest certain rights in retirees with
respect to the type and level of benefits, while the statute concerning
retiree health care benefits does not. Prior opinions of this Office
and court decisions confirm that the pension benefits are a
contractual obligation. The fact that the amount of a retiree’s
subsidy for health care benefits may be related to length of State
service does not alter this essential distinction.
4. Collective bargaining negotiations could result in changes
in the State’s legal obligations concerning retiree health benefits, but
only if the General Assembly specifically adopted those changes.
5. GASB 45, as an accounting standard issued by a private
entity, does not itself impose any legal obligation on the State
concerning the level or funding of retiree health care benefits. Nor
does it express a preference for or prescribe the timing or the method
of financing retiree health care benefits. The creation of an
irrevocable trust to fund retiree health care benefits could be part of
a contractual undertaking of the State to provide those benefits. If
the trust fund consisted in part of employee contributions, there may
be a stronger argument that the State had undertaken to devote the
funds in the trust to retiree health care benefits.
I
Background
A. Retiree Health Care Benefits
1. State Employee and Retiree Health and Welfare
Benefits Program
The General Assembly has provided for health care benefits for
retired public employees in Maryland as part of the State Employee
198 [90 Op. Att’y
and Retiree Health and Welfare Benefits Program (“Program”).
Annotated Code of Maryland, State Personnel and Pensions Article
(“SPP”), §2-501 et seq. The Program is to be available to employees
in all units of State government, including units with independent
personnel systems. SPP §2-502(b).
The Department of Budget and Management (“DBM”) is
charged with administration of the Program. SPP §§2-502, 2-503.
The Legislature has given the Secretary of DBM broad discretion to
design the type and level of benefits available through the Program.
SPP §2-503(b) (“[t]he Secretary may arrange as the Secretary
considers appropriate any benefit option ...”). In exercising that
discretion, the Secretary may consider recommendations from the
Health Insurance Advisory Council, an advisory body consisting of
representatives of various State entities, employee organizations, and
the public. SPP §§2-505, 2-506, COMAR 17.04.13.02.1 The
Secretary also is to specify by regulation the eligibility of various
categories of employees for the Program and the extent of any State
subsidy provided in connection with the Program. SPP §2-503(c).2
1
The Advisory Council is to advise the Secretary concerning:
(1) health insurance benefit options
that should be included in the Program;
(2) types of health care providers that
should be used to provide health insurance
benefits under the Program;
(3) procedures for soliciting bids or
requesting proposals from health care
providers for contracts for the Program;
(4) the implementation, maintenance,
and administration of the health insurance
benefits under the Program; and
(5) negotiations involving health
insurance benefits under the Program.
SPP §2-506(a).
2
Separate sections of the statute set forth the eligibility standards
and benefits for employees of institutions of higher education who retire
under the optional retirement program (SPP §2-509), retired Baltimore
City jail employees (SPP §2-510), employees and retirees of the Maryland
Environmental Service and Northeast Maryland Waste Disposal Authority
(SPP §2-511), employees of certain not-for-profit organizations (SPP §2-
(continued...)
Gen. 195] 199
The Secretary has adopted regulations specifying the eligibility
standards for benefits, among other things. COMAR 17.04.13.
On an annual basis, the Secretary is to recommend to the
Governor the State’s share of costs of the Program for inclusion in
the State Budget. SPP §§2-503(a)(3), 2-504. Finally, the Secretary
is charged with ensuring that the Program complies with federal and
State laws governing employee benefit plans. SPP §2-503(a)(2).
During its past two sessions, the General Assembly limited the
Secretary’s discretion in some respects. In 2004, in the wake of
federal legislation that created prescription drug coverage under
Medicare Part D, it directed that the Program is to include a
prescription drug benefit plan, although it did not specify any
particular elements of that plan. Chapter 296, Laws of Maryland
2004, codified at SPP §2-509.1.3 In 2005, the Legislature gave the
Secretary specific criteria for designing the Program for fiscal years
2006 and 2007. Chapter 444, §7, Laws of Maryland 2005. In
particular, the Legislature directed that the Program provide “the
same health insurance benefits options, prescription drug benefits
options, co-premiums and co-payments” as were provided by the
Program on January 1, 2005. SPP §2-502(c). That legislation also
limited the increase in a participant’s share of premiums in the point-
2
(...continued)
512), county and municipal employees (SPP §2-513), and employees of
regional economic development councils (SPP §2-515).
3
The federal legislation also provided for a federal subsidy of
employers who continue to provide prescription drug coverage for retirees.
42 U.S.C. §1395w-132; see also Fiscal and Policy Note for Senate Bill
614 (March 15, 2004). The federal subsidy is designed to encourage
group health plans to provide retiree prescription drug coverage that is at
least actuarially equivalent to Medicare Part D. See Joint Committee on
Pensions, 2004 Interim Report, Report on the State’s Unfunded Retiree
Healthare Liability, p. 184; see also Fiscal and Policy Note (Revised) for
Senate Bill 548 (March 30, 2004).
200 [90 Op. Att’y
of-service health plan and specified certain parameters for
pharmaceutical benefits.4
4
The statute places the following limitations on changes in
benefits for fiscal year 2006 and 2007:
(2) In fiscal years 2006 and 2007:
(i) the employee or retiree
share of the premium for the employee or
retiree and their dependents for the point of
service health plan may increase to 17%;
(ii) the Program may include
disease management programs;
(iii) the Prescription Drug
Benefit Plan shall offer a voluntary mail
order option and the Prescription Drug
Benefit Plan may charge enrollees the
following co-payments for prescription
drugs:
1. $5 for generic drugs;
2. $15 for preferred drugs
on the State formulary; and
3. $25 for drugs that are
not preferred drugs on the State formulary;
(iv) the Prescription Drug
Benefit Plan may charge a co-payment as
provided in item (iii) of this subsection for
each 45-day prescription;
(v) for each fiscal year, the
total amount of co-payments charged the
employee or retiree and their dependents as
provided in item (iii) of this subsection
may not exceed $700; and
(vi) the Prescription Drug
Benefit Plan may include the following
programmatic changes:
1. implementation of a
step therapy program to assure that lower
cost alternatives are used first;
2. changes i n the
pharmacy network;
3. limitations on the first
prescription for a maintenance drug;
4. limitations on the
quantity of drugs dispensed to reduce
(continued...)
Gen. 195] 201
In 2005, the General Assembly also created a special fund
called the State Employees and Retirees Health and Welfare Benefits
Fund to help finance health care benefits. Chapter 444, §1, Laws of
Maryland 2005, codified at SPP §2-516. This fund is to consist of
moneys appropriated for the fund or authorized to be transferred to
it in the State budget. SPP §2-516(c)(2). For fiscal years 2006 and
2007, any federal subsidy received with respect to Medicare Part D
also is to be deposited in the fund. SPP §2-516(c)(1).5 Moneys in
the fund are to be retained in reserve and used only to fund the
Program pursuant to budget amendment. SPP §2-516(d).
2. Provisions Related to Retiree Benefits
The statute governing the Program provides that certain
categories of retirees “may enroll and participate in the health
insurance benefit options established under the Program.” SPP §2-
508(b)(1).6 While the General Assembly has accorded the Secretary
of DBM considerable discretion in designing the Program, it has
established certain criteria for the participation of retirees in the
Program that relate to the length and dates of State service. Id.
Further, a retiree who chooses to participate in the Program is
entitled to a State subsidy of the benefits if the retiree has five or
4
(...continued)
inappropriate or excessive drug usage;
5. requirements for prior
authorization of drugs to ensure that they
are medically necessary; and
6. implementation of a
drug utilization review program.
SPP §2-502(c)(2). With respect to fiscal year 2006, these provisions
would be regarded as directory, rather than mandatory. See Letter of
Attorney General J. Joseph Curran, Jr., to Governor Robert L. Ehrlich, Jr.,
concerning House Bill 147 (May 19, 2005) p.4 n.4.
5
Any subsidies received after fiscal year 2007 are to be deposited
in the Postretirement Health Benefits Trust Fund. See Part I.B.2 below.
6
In some cases, such benefits are also available to the spouse and
dependent children of deceased retirees. SPP §2-508(b)(2).
202 [90 Op. Att’y
more years of “creditable service.” 7 SPP §2-508(c). The amount of
the subsidy increases with each additional year of creditable service
up to 16 years, when it is to equal the subsidy provided to current
employees. Id. A retiree who receives a disability retirement
allowance is also entitled to a subsidy equal to that of a current
employee. SPP §2-508(c)(1); COMAR 17.04.13.05A(5). In
addition, under the DBM regulations, a retiree who retired prior to
July 1, 1984,8 and an individual who receives a special death benefit
under the State Police Retirement System 9 are also entitled to
equivalent subsidies. COMAR 17.04.13.05A(1), (6).
If a retiree is eligible for Medicare Parts A and B, the benefits
are converted to a Medicare Supplemental Program; any benefits
provided by that program are reduced by the amount that would be
7
“Creditable service” is specifically defined in the statute. SPP
§2-508(a)(2).
8
This subsidy is not specifically authorized in the language of SPP
§2-508 itself, which sets out a pro-rated subsidy based on years of service.
The regulation apparently reflects the agency’s understanding of
legislative intent. Prior to the enactment of the predecessor of SPP §2-508
in 1984, there was a “custom” of providing retirees with subsidized health
care benefits equivalent to those of active employees, although the custom
was not reflected in statute. The Joint Legislative and Executive
Committee on Pensions recommended, among other things, that
employees who retired prior to July 1, 1984, be grandfathered under that
custom. Report of the Joint Legislative and Executive Committee on
Pensions (January 1984), pp.37-40. The legislation that emanated from
that report – the predecessor of SPP §2-508 – was explicitly intended to
incorporate the Joint Committee’s recommendations. See Chapter 290,
Preamble, Laws of Maryland 1984. The language of the statute that was
enacted failed to explicitly reflect that intent with respect to the
grandfathering of those who retired prior to July 1, 1984. However, the
understanding that those retirees were grandfathered under the prior
practice was described in a memorandum of the Secretary of Personnel to
all State employees shortly after the 1984 bill was enacted. Memorandum
of Theodore E. Thornton, Sr., Secretary of Personnel, to All State
Employees (May 15, 1984).
9
This subsidy was originally provided by statute. See Chapter
745, Laws of Maryland 1985, then codified at Article 64A, §48B(c)(2)(ii).
However, the reference to the subsidy was apparently inadvertently
dropped from the statute during code revision. Chapter 10, §2, Laws of
Maryland 1993.
Gen. 195] 203
provided by Medicare, regardless of whether the retiree has actually
enrolled in Medicare. COMAR 17.04.13.08. As noted above, since
2004, the Legislature has also directed that “[t]he State shall
continue to include a prescription drug benefit plan in the health
insurance benefit options established under the Program and
available to retirees ... notwithstanding the enactment of [Medicare
Part D] or any other federal law permitting states to discontinue
prescription drug benefit plans to retirees of a state.” SPP §2-509.1.
The State currently finances retiree health care benefits in the
same way as employee benefits – through the annual budget process.
See SPP §2-504; Joint Committee on Pensions, 2004 Interim
Report, Report on State’s Unfunded Retiree Healthcare Liability, pp.
178-79. Recently, the Legislature created the Postretirement Health
Benefits Trust Fund (“Trust Fund”) to assist in the future financing
of the retiree health insurance subsidy provided by the Program.
Chapter 466, Laws of Maryland 2004, codified at SPP §34-101. The
Trust Fund is to consist of any federal moneys received by the State
as a result of the Medicare Part D program or any similar federal
subsidy related to the State’s prescription drug program for fiscal
year 2008 and later. SPP §34-101(d). Any moneys deposited in the
Trust Fund are to accumulate and no payments may be made until
after fiscal year 2017. SPP §34-101(g). Thereafter, moneys from
the Trust Fund are to be transferred to the State’s general fund on an
annual basis to help finance the subsidy for retiree health care
benefits according to a formula. SPP §34-101(h).10 If the State
discontinues that subsidy, any moneys in the Trust Fund are to be
transferred to the general fund. SPP §34-101(i).
B. GASB 45
GASB was created in 1984 by the Financial Accounting
Foundation to establish and improve standards for financial
accounting and reporting for state and local government entities. See
Facts About GASB,
independent, not-for-profit, private organization, it has no power to
impose its standards on government entities. However, GASB
standards are considered part of generally accepted accounting
10
The amount transferred each year is to equal the lesser of: (1)
one-quarter of the Trust Fund’s investment gains for the prior year; and (2)
the annual cost of the retiree health care benefits provided under SPP §2-
508.
204 [90 Op. Att’y
principles (GAAP).11 Government auditors and other oversight
officials, as well as the municipal bond industry and other users of
government accounting and financial reports, look to compliance
with GASB standards as a benchmark for financial reporting. GASB
describes its authority as follows:
The GASB is not a federal agency. The
federal government does not fund GASB, and
its standards are not federal laws or rules. The
GASB does not have enforcement authority to
require governments to comply with its
standards. However, compliance with the
GASB’s standards is enforced through the
audit process, when auditors render opinions
on the fairness of presentations to conformity
with GAAP, and through the laws of
individual states, many of which require local
governments to prepare GAAP basis financial
statements. In addition, the municipal bond
industry prefers that governments issuing debt
prepare their financial statements on a GAAP
basis.
GASB, GASB at a Glance, Question 8.
In 2004, GASB issued Accounting and Financial Reporting by
Employers for Postretirement Benefits Other than Pensions,
Statement on Governmental Accounting Standards No. 45 (2004).
GASB 45 applies to government employers who provide post
employment benefits in addition to pensions – referred to as Other
Post Employment Benefits or “OPEB.” OPEB includes health care
benefits, and also may include other benefits provided separately
from pension benefits. GASB, Summary of Statement 45 (June
2004),
are part of the compensation earned by employees for services
rendered, benefits are earned and employers incur a cost for those
benefits as services are rendered. Id. GASB 45 requires that the
liability for such obligations be accrued to provide a more accurate
11
The American Institute of Certified Public Accountants requires
auditors to note non-compliance with GASB standards when an auditor
expresses an opinion on whether an entity’s financial reports are presented
in accordance with generally accepted accounting principles (“GAAP”).
AICPA, Rules of Professional Conduct, §§203, 203-2.
Gen. 195] 205
accounting of the cost of OPEB at the time services are performed.
Id. GASB 45 provides for implementation of the standard by a
government entity such as the State in fiscal year 2008.12
To comply with GASB 45, a government employer will have
to report OPEB costs on an accrual basis. In order to do that, it will
have to obtain an actuarial valuation of OPEB costs. Such a
valuation involves a projection of future cash outlays for benefits,
based on various assumptions, the discounting of those outlays to a
current present value, and the amortization of that sum over a period
that approximates the anticipated years of the average worker’s
employment. The result is referred to as the government employer’s
“annual required contribution” or “ARC”. The ARC should be
sufficient to fund the benefits expected to be earned in the future, as
well as to amortize unfunded benefits attributed to the past. GASB,
Guide to Implementation of GASB Statements 43 and 45 on Other
Postemployment Benefits, p. 29.
GASB believes that this method of reporting will provide
“more accurate information about the total cost of the services that
a government provides ...” GASB, GASB Statement 45 on OPEB by
Governments - A Few Basic Questions and Answers, p.1 (emphasis
in original). In addition, it will make clear whether a government
has covered its OPEB cost for the year; to the extent that a
government chooses to defer that cost, “the higher will be (a) its
unfunded actuarial accrued liability and (b) the cash flow demands
on the government and its tax or rate payers in future years.” Id.
C. Task Force and Valuation Study
During its most recent session, the Legislature created the Task
Force to Study Retiree Health Care Funding Options, which you co-
chair. Chapter 298, Laws of Maryland 2005. We understand that, in
accordance with the 2005 legislation, the Task Force commissioned
through DBM an actuarial study of the State’s OPEB obligation in
connection with the Program. See Aon Consulting, State of
Maryland Postemployment Benefits other than Pension Actuarial
Valuation (October 2005). That study analyzed data provided by the
State and, based upon the consultant’s understanding of the GASB
12
GASB 45 is being phased in, beginning with the largest
governments, and is effective for the fiscal year beginning after December
15, 2006 for governments with annual revenues in excess of
$100,000,000. GASB, Summary of Statement 45 (June 2004).
206 [90 Op. Att’y
standards, concluded that the ARC for the State’s Fiscal Year 2006
would be $1.959 billion if GASB 45 were currently in effect. Id.,
p.6.
II
Analysis
A. The State’s Legal Obligation to Provide Retiree Health Care
Benefits
You ask whether the State has “a statutory, contractual, or
other legal obligation” to provide health care benefits to current
retirees and several different categories of future retirees. We
address this question with respect to benefits provided under the
Program, which were the subject of the recent valuation study.
1. Statutory Obligation
As outlined above, State law currently requires the Secretary
of DBM to administer the Program for the benefit of retirees, as
well as current employees. The statute does not specify the type or
level of benefits that the State is to provide, but delegates that
determination to the Secretary, except in two respects. First, the
Legislature has required the Secretary to include the same benefit
options for fiscal years 2006 and 2007 as were part of the Program
on January 1, 2005. Second, there must be a prescription benefit
plan as part of the Program, although the Legislature has not
specified any particular elements of that plan except for fiscal years
2006 and 2007.
While the statute provides for a State subsidy of the costs of
the Program – a subsidy that is to be pro-rated for most employees
who retire after July 1, 1984 – it does not set the level of the State
subsidy of these benefits. Rather, it contemplates that the Secretary,
with the advice of the Health Insurance Advisory Council, will make
an annual recommendation to the Governor as to the extent of the
State subsidy of those benefits and, accordingly, the amount to be
dedicated to that purpose in the State budget. However, the 2005
legislation did place some constraints on the Governor’s discretion
Gen. 195] 207
in this area,13 as it required the provision of certain benefit options
and set a cap on the increase of the employee or retiree share of
some premiums for fiscal years 2006 and 2007. See SPP §2-
502(c)(2).
In sum, at present, the State has a general statutory obligation
to make available health care benefits for certain retirees and to
provide a partial subsidy of those benefits as specified in statute and
regulation. The Secretary of DBM and the Governor enjoy relatively
unfettered discretion to set benefit and subsidy levels in the proposed
budget submitted to the General Assembly for fiscal years
subsequent to 2007. While the Legislature may under the State
Constitution mandate the inclusion of particular expenditures in the
State budget under certain conditions, it has generally not done so
with respect to the Program.14
Of course, in general, a statute may be amended by the General
Assembly. Thus, the General Assembly could alter this statutory
obligation at any time, unless there were a constitutional limitation
on the Legislature’s power to do so. The federal Constitution would
limit alteration of the Program by the General Assembly if the
amendment of the statute was a “law impairing the obligation of
contracts.” See United States Constitution, Article I, §10, cl. 1
(“Contract Clause”).
2. Contract Clause Analysis
To assess whether a legislative action impairs contract rights,
the first question is whether a contractual obligation exists. There
is a strong presumption that statutes do not create contractual rights.
Nat’l R. Passenger Corp. v. Atchison, Topeka & Santa Fe. R. Co.,
470 U.S. 451, 465-66 (1985). “[T]he principal function of a
legislature is not to make contracts, but to make laws that establish
the policy of the state.” Id. In determining whether a statute creates
13
To some extent these constraints are directory rather than
mandatory. See footnote 4 above.
14
Under certain conditions, the General Assembly may mandate
the inclusion of a particular expenditure in the State budget. Maryland
Constitution, Article III, §52(11). The Legislature has generally not
exercised this authority in establishing a subsidy for employee and retiree
health care benefits, presumably to allow the Secretary flexibility in
responding to the evolving market for health care benefits.
208 [90 Op. Att’y
a contractual obligation, there must be “an adequate expression of an
actual intent” of the state to bind itself. Id. at 466-67. Thus, “a
statute is itself treated as a contract when the language and
circumstances evince a legislative intent to create private rights of a
contractual nature enforceable against the State.” United States
Trust Co. v. New Jersey, 431 U.S. 1, 17 n.14 (1977). This power is
subject to the proviso, under what is known as the reserved powers
doctrine, that a state cannot enter into a contract that “surrenders an
essential attribute of its sovereignty.” Id. at 23.
If there is a contract, the next question is whether the State’s
action impairs private rights under the contract. United States Trust
Co., 431 U.S. at 19-21. Even if it does, it may not violate the federal
Constitution, as not every impairment by a state of its contractual
obligations is prohibited by the Contract Clause. Not all
impairments of contractual obligations are unconstitutional; an
impairment is constitutional if it is reasonable and necessary to serve
an important public purpose. Id. at 21-26. In that regard, the courts
accord a degree of deference to a legislative judgment of
reasonableness and necessity. See Baltimore Teachers Union v.
Mayor and City Council of Baltimore, 6 F.3d 1012, 1019 n.10, 1022
(4 th Cir. 1993), cert. denied, 510 U.S. 1141 (1994); Maryland State
Teachers Association, Inc. v. Hughes, 594 F.Supp. 1353, 1360-62
(D.Md. 1984), aff’d, No. 84-2213 (4 th Cir. 1985), cert. denied, 475
U.S. 1140 (1986); 68 Opinions of the Attorney General 366 (1983).
In Hughes, the federal district court applied the analysis
outlined above and concluded that State legislation reforming the
State pension law did not amount to an unconstitutional impairment
of contractual rights. In that case, State employee groups challenged
the 1984 Pension Reform Law arguing that it unconstitutionally
impaired contract rights conferred by a 1979 pension law. The court
assumed, without deciding, that the 1979 law created a contractual
right to certain pension benefits. 594 F.Supp. at 1362-63. Even
under that assumption, the court found that the State retained the
power to amend or alter the contract to enhance the actuarial
soundness of the plan. Id. The court then turned to the question of
impairment. It first concluded that the 1984 law did not deny vested
or earned pension rights retroactively and allowed employees to
protect pension benefits earned up to the effective date of the law by
selecting a particular option from the “menu” offered by the 1984
law. Id. at 1363-64. Relying on City of Frederick v. Quinn, 35
Gen. 195] 209
Md.App. 626, 371 A.2d 724 (1977)15 and a prior opinion of this
Office, the court held that “Maryland law would not extend
unalterable contract protection against change in pension benefits
which were to be earned on a pro rata basis by employment service
in the future.” Id.
Finally, the court held that, to the extent that the 1984 law did
in fact impair any contract right, it was supported by “an important
and legitimate public purpose”– i.e., protecting the soundness of the
retirement system that had been created by the 1979 legislation. 594
F.Supp. at 1364-70. The court found that the 1984 law was a
reasonable and necessary response to problems that had surfaced
since 1979. Accordingly, the 1984 law did not violate the Contract
Clause of the federal Constitution, regardless of whether it had
impaired a contractual obligation of the State. Id. The court
deferred to the General Assembly’s judgment in determining how
best to preserve the stability of the State pension systems. See also
76 Opinions of the Attorney General 351, 354-56 (1991) (applying
analysis described in Hughes and concluding that proposed
legislation imposing benefits limits in order to allow the pension
system to retain tax-qualified status with the IRS did not violate
Contract Clause).
3. Whether the Health Benefits Statute Creates a
Contractual Obligation
As noted above, there is a presumption that statutes do not
create contractual rights unless there is a clear legislative intent to do
so. The State statute that extends employee health benefits to certain
classes of retirees does not expressly create a contractual right.
Apart from certain provisions relating to fiscal years 2006 and 2007,
it does not purport to promise any particular level of benefits or
subsidy to employees. The benefits and subsidy made available to
retirees are keyed to those to which current employees are entitled.16
15
In Quinn, the Court of Special Appeals held that, even though
municipal employees had vested rights in a pension plan, those rights were
subject to the power of the city to make reasonable and necessary
modifications.
16
It is also notable that the statute states that a retiree “may enroll
and participate” in the Program – clearly indicating that the retiree has a
choice. By contrast, employees are automatically enrolled in pension
programs. See Part II.C. of this opinion, below.
210 [90 Op. Att’y
The statute does not appear to confer any greater right to benefits
and a State subsidy to retirees. Nor is there any clear and express
language that vests retirees with benefits. We are not aware of any
Maryland cases that hold that State retiree health care benefits
authorized by statute generally are a contractual right.
Thus, in our view, there is no contractual right to retiree health
care benefits that could be impaired if the General Assembly were
to amend the statute to change the level of benefits or subsidy or
were to continue to leave the extent of benefits to the Secretary’s and
Governor’s discretion.17 On the other hand, the General Assembly
could confer a contractual right to health care benefits by enacting
legislation to that effect, if it chose to do so. However, such a
commitment would be subject to modification in the future by the
General Assembly under the standards set forth in Hughes and other
cases construing the Contract Clause.
B. Case Law in Other States Concerning Retiree Health Care
Benefits
You have asked whether there is any case law concerning
alteration of retiree health care benefits, particularly in other states
whose bonds have received the highest rating from the rating
agencies. We are not aware of any case law that construes or applies
GASB 45 – which is not surprising, as GASB 45 was only recently
issued. Nor are we aware of any case law concerning the alteration
of retiree health care benefits in other states whose bonds have been
given the highest rating by the bond rating agencies.18
17
Nor do we believe that modification of SPP §2-508 would affect
a property interest or vested right protected by the Due Process Clause of
the federal Constitution or Articles 19 and 24 of the Maryland Declaration
of Rights. See Flemming v. Nestor, 363 U.S. 603, 610 (1960) (“To engraft
upon the Social Security system a concept of ‘accrued property rights’
would deprive it of the flexibility and boldness in adjustment to
everchanging conditions which it demands.”).
18
We understand that the other states, in addition to Maryland,
whose bonds have achieved the top rating from all of the major rating
agencies are: Delaware, Georgia, Missouri, Utah, and Virginia.
One case in Georgia held that a life insurance benefit provided to
retirees was not vested. Wilson v. City of East Point, 360 S.E.2d 254
(continued...)
Gen. 195] 211
Courts in other states have rendered opinions concerning the
alteration of health care benefits of retired public employees. Most
of those opinions are of limited value in answering the questions you
have raised, as they construe state constitutional provisions, statutes,
or contracts peculiar to the particular state.
Some courts have looked to the Employment Retirement
Income Security Act of 1974 (“ERISA”), 29 U.S.C. §1001 et seq.,
for guidance. ERISA, which applies to private employers,19
distinguishes pension plans from “welfare benefit plans” (defined to
include retiree health insurance benefits). 29 U.S.C. §1002(1), 2(a).
In particular, it excepts welfare benefit plans from its vesting
requirements. 29 U.S.C. §1051(1). The exclusion of welfare benefit
plans from the ERISA vesting requirement has been attributed to the
fluctuating and unpredictable nature of the costs of such plans:
Actuarial decisions concerning fixed annuities
are based on fairly stable data, and vesting is
appropriate. In contrast, medical insurance
must take account of inflation, changes in
medical practice and technology, and
increases in costs of treatment independent of
inflation. These unstable variables prevent
accurate predictions of future needs and costs.
Moore v. Metropolitan Life Ins. Co., 856 F.2d 488, 492 (2d Cir.
1988). Under ERISA, an employer may voluntarily create a vested
right in retiree health care benefits.20
18
(...continued)
(Ga.S.Ct. 1987). However, that case involved construction of a municipal
ordinance that explicitly limited the benefit “for such time as may be
determined by the City Council.”
19
ERISA does not apply to government retirement and benefit
plans. 29 U.S.C. §1003(b).
20
There is some variation in the cases as to how explicitly that
intent must be expressed. See Poole v. City of Waterbury, 831 A.2d 211,
221-22 (Conn.S.Ct. 2003).
212 [90 Op. Att’y
In Davis v. Wilson County, 70 S.W.3d 724 (Tenn.S.Ct. 2002),
the Tennessee Supreme Court relied on an analogy to ERISA to hold
that employees do not automatically have a vested interest in welfare
plan benefits – such as retiree health care benefits. Rather there
must be “clear and express language” indicating an intent to confer
a vested benefit. 70 S.W.3d at 727-28. In the case before it, the
court found no evidence of such intent.
Similarly, in Colorado Springs Fire Fighters Ass’n v. City of
Colorado Springs, 784 P.2d 766 (Colo.S.Ct. 1989) (en banc),
plaintiffs argued that a 1966 municipal ordinance that provided for
full payment of retiree health insurance costs amounted to a
“contractual, quasi-pension benefit” and that a subsequent ordinance
reducing that benefit was an unconstitutional impairment of contract
rights. However, in concluding that the program was not a “pension
benefit”, the Colorado Supreme Court found that the municipal
program was similar to a state retiree health benefit program, under
which the amount of the health benefit premium subsidy was
determined on an annual basis, the cost and design of the program
was subject to change, and employee participation was optional. 784
P.2d at 771. The court also drew an analogy to ERISA’s exclusion
of welfare plan benefits, such as health insurance, from mandatory
vesting. Id. at 772. The court held that the municipal ordinance did
not otherwise create an enforceable contract because, among other
things, it did not address the level of benefits.
Without making an explicit analogy to ERISA, some courts
have looked to the use of elective language in a statute conferring
health care benefits and the unpredictable costs of such benefits to
conclude that a legislature did not intend a contractual obligation.
For example, Bernstein v. Commonwealth, 617 A.2d 55 (Pa.
Cmwlth. 1992), involved an interpretation of a Pennsylvania statute
that provided for an “election” by retirees of State health care
coverage. The case arose after Pennsylvania changed the health care
options for its retirees to eliminate coverage duplicative of Medicare
Part B. Some retirees challenged this change in benefits, arguing
that it amounted to an unconstitutional impairment of their contract
rights. The court held that the statutory language merely gave a
retiree an option to participate in the employee health coverage. It
also concluded that the state legislature, recognizing the practical
reality of fluctuating health care costs, had not committed the state
to any particular plan. The court noted that the amount of the state
share of the costs of the health insurance program had changed over
the period that the plaintiffs had been active employees, thus
undermining any contention that they had an expectation of a
Gen. 195] 213
particular level of benefits upon retirement. 617 A.2d at 59-60. But
see Thorning v. Hollister School District, 15 Cal.Rptr.2d 91, 94-95
(Ct.App. 1993) (although both statute allowing for retiree health care
benefits and local policy under that statute were phrased in elective
language, retired school board members who had elected those
benefits had vested right because elements of compensation for
elected officers became contractually vested upon acceptance of
employment).
Several states have constitutional provisions that protect the
“accrued” benefits of retirees. However, courts have reached
differing conclusions about whether health care benefits fall within
that category. In Duncan v. Retired Public Employees of Alaska,
Inc., 71 P.3d 882 (Ak. S.Ct. 2003), the Alaska Supreme Court held
that health insurance benefits were part of the “accrued benefits” of
the state employee retirement systems. Accordingly, they were
subject to a state constitutional provision that specifically prohibited
the diminishment or impairment of such benefits. However, the
court held that the prohibition did not prevent the state from
modifying retiree health care benefits so long as the modifications
were reasonable and any disadvantageous changes were offset by
beneficial changes from a group perspective.21
Like Alaska, Michigan also has a provision in its state
constitution that protects “accrued financial benefits” of public
employees from impairment or diminishment. In Studier v.
Michigan Public School Employees’ Retirement Board, 698 N.W.2d
350 (Mich.S.Ct. 2005), the Michigan Supreme Court held that the
phrase did not encompass retiree health care benefits.22 In addition,
the court also held that the statute creating retiree health care
benefits did not establish a contractual obligation and that
modification of the prescription drug benefits – increasing co-
21
The court rejected the plaintiff’s argument that the issue of
impairment should be measured from the perspective of an individual
employee. 71 P.3d at 889.
22
In concluding that retiree health care benefits were not “accrued
financial benefits” for purposes of the Michigan constitution, the court
noted that, unlike pension benefits, the amount of health care benefits did
not increase with the retiree’s years of service and therefore “they are not
accrued.” 698 N.W.2d at 358. It also reasoned that health care benefits
are not “financial” benefits as they do not consist of monetary payments.
Id.
214 [90 Op. Att’y
payments and implementing monetary incentives to encourage the
choice of formulary drugs – would not implicate the contract clauses
of the state or federal constitutions. Rather, the court found that the
Michigan legislature had simply made a policy decision that there
would be a subsidy for a retiree who chose to participate in whatever
plan the state authorized; the statute did not require that any
particular plan be developed or that the plan could not be later
amended. Id. at 363-64.
Some court decisions relate to the public collective bargaining
law of the particular state, as well as particular collective bargaining
contracts. In Poole v. City of Waterbury, 831 A.2d 211 (Conn.S.Ct.
2003), a city confronted with a financial crisis entered into a new
collective bargaining agreement that replaced a prior indemnity plan
for employee and retiree health care benefits with a managed care
plan. Retired municipal firefighters challenged that modification,
arguing that they had a vested right in the medical benefits provided
by the collective bargaining agreement with the city at the time of
retirement. In construing ambiguous language in particular
collective bargaining contracts, the Connecticut Supreme Court held
that, although the plaintiffs had a vested right to retiree medical
benefits generally, they did not have a vested right in the particular
menu of benefits provided in an expired collective bargaining
agreement. 831 A.2d at 231-32. Rather, the court would look to
whether the benefits provided to retirees were “reasonably
commensurate” with the benefits afforded by an agreement, when
viewing the group of retirees as a whole. 831 A.2d at 234. In
discussing whether there should be a presumption in favor of vesting
of retiree health care benefits, the court contrasted the inability to
predict or control health insurance costs with the more predictable
nature of pension benefits. Id. at 223. The court also noted that it
would be “counter to all of the parties’ interests” to construe the
collective bargaining agreements to freeze benefits in the exact plan
provided at the time of retirement. Id. at 233.
On the other hand, in Roth v. City of Glendale, 614 N.W.2d
467 (Wis.S.Ct. 2000), the Wisconsin Supreme Court interpreted a
series of limited term collective bargaining agreements between a
city and union that included provisions for subsidizing retiree health
care benefits and adopted a presumption that such benefits vest
unless the language of the contract provided otherwise. The Court
treated those benefits as part of the package of retirement benefits
that ordinarily last beyond the life of the contract, in the absence of
contract language or extrinsic evidence demonstrating a contrary
intention. Id. at 471-74.
Gen. 195] 215
As this brief summary of case law in other jurisdictions
illustrates, there is no consensus in the courts that retiree health care
benefits are a vested or contractual right. The cases concerning
public employees in other jurisdictions reach various conclusions,
depending on the particular constitutional provisions, statutes, or
collective bargaining agreements that govern the benefits at issue.
C. Distinction Between Pension Benefits and Health Care
Benefits
You have asked whether there are legal distinctions between
a retiree’s right to pension benefits and to health care benefits. A
key distinction is that retirees have a contractual right to pension
benefits, but not to health benefits. This distinction is borne out in
a number of ways.
Pension statutes refer to membership in the pension system as
a “condition of employment.” See, e.g., SPP §§23-203 (Employees’
Pension System), 23-208 (Teachers’ Pension System), 22-202(a)
(Employees’ Retirement System), 22-206(a) (Teachers’ Retirement
System), 24-202 (State Police Retirement System), 25-202
(Correctional Officers’ Retirement System). Citing similar language
in a prior version of the State retirement law, Attorney General
Sachs concluded that the law created a contractual obligation,
although benefits were subject to reasonable modification by the
General Assembly for the purpose of maintaining the financial
flexibility and integrity of the retirement systems. 68 Opinions of the
Attorney General 366 (1983);23 see also 61 Opinions of the Attorney
General 746, 747-51 (1976) (concluding that earlier version of
pension law demonstrated intent to create contractual rights).
The retirement law specifically refers to the “vesting” of
pension benefits. See, e.g., SPP §20-101(tt) (definition of “vested
allowance”); §21-112(2)(ii) (members of retirement systems entitled
to annual report showing “vested benefits”); §22-213 (transfer of
vested rights between systems); §23-501 (continuation of benefits
for “former vested members”); §§29-302, 29-303 (computation of
vested allowance); §§29-304, 29-305 (immediate vesting for heads
23
Attorney General Sachs’ opinion anticipated the Legislature’s
subsequent enactment of pension reform legislation in 1984 and the
federal district court’s decision upholding that legislation against a
Contract Clause challenge. See Maryland State Teachers Ass’n, Inc v.
Hughes, supra.
216 [90 Op. Att’y
of units and other officials). In addition, the State retirement law
explicitly guarantees the payment of retirement allowances and other
benefits provided by the pension laws. SPP §21-302. The statute
provides that “the following are obligations of the State”:
(1) the payment of all allowances and
other benefits payable under ... [the State
pension laws];
(2) the creation and maintenance of
reserves in the accumulation funds of the
several systems;
(3) the crediting of regular interest to the
annuity savings funds of the several systems;
and
(4) the payment of expenses for
administration and operation of the several
systems.
SPP §21-302(a).24
Maryland courts have adopted the view that government
pension plans are contractual in nature, “but under certain
circumstances the government may unilaterally modify them so long
as any changes do not adversely alter the benefits, or if the benefits
are adversely altered, they are replaced with comparable benefits.”
Davis v. City of Annapolis, 98 Md. App. 707, 715, 635 A.2d 36
(1994) (Cathell, J.) (police officer entitled to disability pension
benefits under the statute in effect at the time of injury). See also
Board of Trustees of Employees’ Retirement System v. Mayor and
City Council of Baltimore City, 317 Md. 72, 100, 562 A.2d 720
(1989), cert. denied, 493 U.S. 1093 (1990) (“There is no doubt that,
by establishing the pension systems, the City imposed contractual
obligations on itself”); Quesenberry v. Washington Sububran
Sanitary Commission, 311 Md. 417, 423, 535 A.2d 481 (1988)
(stating that rights conferred by a public pension plan are contractual
24
The statute further specifies that the assets of the pension
systems are to be used to pay these obligations and that the State is to
make up any amount each year in the accumulation fund of each system
necessary to pay allowances and other benefits out of the fund for the year.
SPP §21-302(b)-(c).
Gen. 195] 217
in nature, although they may be modified by unilateral action of the
employer in certain circumstances); City of Frederick v. Quinn, 35
Md.App. 626, 629-31, 371 A.2d 724 (1977) (holding that
government pensions are “more contractual than gratuitous” and
citing a “reserved legislative power” to make reasonable
modifications in a pension plan).25 Courts in other states have also
concluded that state and local governments have undertaken
contractual obligations in creating pension plans. See 16B
Am.Jur.2d, Constitutional Law, §721.
By contrast, as noted above, retirees do not have a contractual
right to health care benefits. SPP §2-508, in providing retiree health
care benefits, neither states that a retiree “vests” in Program or
subsidy eligibility, nor characterizes any portion of the Program as
an “obligation of the State” to retirees. Rather, there is a statutory
right, the delineation of which has been largely delegated to the
Secretary of DBM and the Governor, and which is subject to change
by the General Assembly.
The distinction between pension benefits and health care
benefits is also borne out by the method of funding chosen by the
Legislature. The State retirement law provides for advance funding
of pension benefits with government and employee contributions and
creates specific funds for each of the State’s retirement systems.
SPP §21-301 et seq. By contrast, with limited exceptions, the
funding of the subsidy of benefits in the Program is left to the
judgment of the Secretary of DBM and the Governor in devising an
25
In Quinn, Judge Lowe summarized the circumstances under
which a government pension plan could be altered:
Each case where a changed plan is substituted
must be analyzed on its record to determine
whether the change was reasonably intended to
preserve the integrity of the pension system by
enhancing its actuarial soundness, as a reasonable
change promoting a paramount interest of the
State without serious detriment to the employee.
In short, the employee must have available
substantially the plan he bargained for and
diminution thereof must be balanced by other
benefits or justified by countervailing equities for
the public’s welfare.
35 Md. App. at 631.
218 [90 Op. Att’y
amount to include in the proposed budget. SPP §2-503(a)(3). There
is no suggestion that this estimate must satisfy a pre-existing
obligation.
It is true that the Legislature has created two special funds to
help finance retiree health care benefits in the future. SPP §§2-516
(State Employees and Retirees Health and Welfare Benefits Fund);
34-101 (Postretirement Health Benefits Trust Fund). However, the
first fund is specifically identified as a “special reserve fund ... to
retain certain State revenues and State general and special funds for
the purpose of funding the [Program].” SPP §2-516(b)(1). This
reserve fund would help finance health care benefits of current
employees, as well as retirees. The statute establishing the reserve
fund does not create any specific obligation to retirees.
In addition, when it created the second fund – the Trust Fund
– the Legislature did not commit to provide health care benefits to
retirees. The implementing law for the Trust Fund provides that, “if
for any reason the State discontinues the postretirement health
insurance subsidy specified in [SPP §2-508], the assets of the [Fund]
shall be transferred to the General Fund.” SPP §34-101(i). This
provision recognizes the possibility that the subsidy for retiree health
care benefits could be eliminated in the future; in that event, retirees
would have no special claim on the moneys in the Trust Fund,
indicating that the Legislature did not intend to create a contractual
obligation to retirees in creating the Trust Fund.
The General Assembly has specifically distinguished health
care benefits from pension benefits. The statute that establishes the
Program, including health care benefits, states that the Program
“may not contain any of the benefits provided under Division II ...”
– i.e., pension benefits. SPP §2-502(b)(2).
Finally, consistent with the statutory provisions, the materials
published to employees and retirees concerning health care benefits
have explicitly disclaimed any intention to create a contractual
obligation to provide health care benefits. The booklet that
summarizes State benefits for employee and retirees prominently
states, on its inside cover: “ This Book is Not a Contract.” DBM,
Summary of Benefits for Active & Retired Employees (July 1, 2005
– June 30, 2006). Similarly, the summary of health insurance
benefits published by the State Retirement Agency states:
Gen. 195] 219
Membership in the State Health Program does
not constitute a contract. The provisions of
the program are subject to annual review and
modification. Costs may vary each year.
State Retirement Agency, Benefits Handbook for the Employees and
Teachers Pension Systems (Rev. July 2004), p.46; see also id., p.47
(disclaimer paragraph concerning retiree health benefits entitled
“This is Not a Contract”)
You note that the State subsidy of health care benefits provided
to retirees under SPP §2-508 increases to a certain extent with the
length of service of the retiree. You ask whether the relation of the
subsidy to length of service results in a contractual obligation. It is
true that the statute does not provide all retirees with the same
subsidy as current employees, but allocates the amount of the State
subsidy to a retiree in relation to some extent to the individual’s
years of service. In doing so, the statute incorporates the concept of
“creditable service” and certain time periods from the pension
statutes. However, they are used in SPP §2-508 to compute a
particular retiree’s share of whatever subsidy is provided to current
employees under the Program, not to set a particular benefit or
subsidy level.26 In our view, this does not change the nature of the
benefits provided. As noted above, the statute generally does not
establish any particular level of benefits or subsidy and, indeed,
contemplates that they will ordinarily depend on annual budget
decisions.
In summary, while pension benefits under the State retirement
law may be considered a contractual obligation of the State, retiree
health care benefits provided through the Program are not. Cf. 78
Opinions of the Attorney General 296 (1993) (distinguishing group
health insurance benefits from pension benefits for purposes of the
prohibition against in-term increases in “compensation” in Article
III, §35, of the State Constitution).
26
Even in a state with a constitutional provision protecting
“accrued” financial benefits, this factor would not be conclusive on
whether health care benefits fall within that phrase. See note 22 above.
220 [90 Op. Att’y
D. Effect of Collective Bargaining Agreements on Retiree
Health Care Benefits
You have asked whether the State’s legal obligations regarding
retiree health care benefits can be altered as a result of a collective
bargaining agreement between the Administration and employee
organizations. The short answer is that a collective bargaining
agreement can affect retiree health care benefits, but only if the
change is adopted by the General Assembly.27
The State collective bargaining law sanctions collective
bargaining for many, but not all, employees of the executive branch.
SPP §3-101 et seq. The statute contemplates that representatives of
the State will negotiate with the exclusive representatives of various
categories of employees. SPP §3-501. The negotiations are to
include “all matters relating to wages, hours, and other terms and
conditions of employment.” SPP §3-502. Any agreement resulting
from the negotiations is to be incorporated in a memorandum of
understanding (“MOU”). An MOU is not effective unless it is
ratified by the Governor, as well as a majority of votes cast by
employees in the bargaining unit. SPP §3-601(c); see also Ehrlich
v. Maryland State Employees Union, 382 Md. 597, 856 A.2d 669
(2004).28
The statute contemplates that Governor will include any
additional costs resulting from a ratified MOU in the proposed
budget for the relevant departments. SPP §3-501(c)(2)(ii).29
27
We address only retiree health care benefits that were the subject
of the recent actuarial valuation study and that may be affected by
agreements under the State’s collective bargaining law. We do not
address retiree health care benefits that may be provided under other
collective bargaining regimes, such as agreements between the Maryland
Transit Administration and its employees. See Annotated Code of
Maryland, Transportation Article, §7-601 et seq.
28
In the case of an institution of higher education, the MOU must
be ratified by the institution’s governing board, as well as a majority of
employees in the bargaining unit. SPP §3-601(c)(2).
29
The statute states:
In the budget bill submitted to the General
(continued...)
Gen. 195] 221
Pursuant to the State Constitution, the General Assembly remains
free to reduce or strike those appropriations when it considers the
Governor’s proposed budget. Maryland Constitution, Article III,
§52(6). In addition, to the extent that negotiations result in an MOU
that has terms inconsistent with current law, those terms become
effective only if the General Assembly amends the applicable law.
SPP §3-502(c).
In our view, retiree health care benefits would be encompassed
within “wages, hours, and other terms and conditions of
employment” and thus can be a subject of collective bargaining
under the State collective bargaining law. The Administration could
negotiate with employee representatives concerning the types and
level of health care benefits to be included in the Program designed
by the Secretary for employees and, by operation of SPP §2-508,
certain classes of retirees. However, the costs associated with any
such agreement would be subject to reduction or elimination as part
of the General Assembly’s budget process. In addition, to the extent
that the MOU embodied an agreement for retiree health care benefits
different from those in current law, the change could not become
effective until the General Assembly amended the law.
Thus, a collectively bargained MOU could only change the
nature of retiree health care benefits if the General Assembly
incorporated that change in the law.30 As we understand it, none of
29
(...continued)
Assembly, the Governor shall include any
amounts in the budgets of the principal units
required to accommodate any additional cost
resulting from the negotiations, including the
actuarial impact of any legislative changes to any
of the State pension or retirement systems that are
required ...
SPP §3-501(c)(2)(ii).
30
There is case law in other states holding that promises made in
a collective bargaining agreement may confer a vested right to retiree
health care benefits. See Poole v. City of Waterbury, 831 A.2d 211, 222
n.10 (Conn.S.Ct. 2003) (collecting cases); see also Minnesota Op. Atty.
Gen. 125A-28, 2001 WL 505668 (2001) (provision of state statute
governing collective bargaining limited duration of promise of retiree
(continued...)
222 [90 Op. Att’y
the collective bargaining MOUs to date between the State and
recognized representatives have specifically addressed the subject of
retiree health care benefits. To the extent that MOUs have referred
to employee health care benefits, they have not deviated from the
existing statutory provisions.
E. GASB 45 and the Use of a Trust to Fund Benefits
Finally, you ask several questions related to the creation of a
trust to fund retiree health care benefits.
1. Whether GASB 45 Creates Legal Obligations
You ask whether GASB 45 creates any legal obligations for the
State to treat retiree health care benefits in the same manner as
pension benefits. As noted above, GASB is a private organization
that develops accounting standards. It has no authority to impose
legal obligations on the State and does not purport to do so.
Moreover, GASB 45 itself was not intended to mandate any
particular level of benefits or method of financing those benefits.
GASB has explained:
Q - Does Statement 45 require that an
employer change its method of financing
OPEB ... to begin paying the ARC or
otherwise accumulate plan net assets in order
to fund the actuarially accrued benefits in
some manner?
A - No. Statement 45 establishes standards
for an employer’s accounting and financial
reporting of OPEB. The ARC is used in the
measurement of ... OPEB expense ...
See GASB, Guide to Implementation of GASB Statements 43 and 45
on Other Postemployment Benefits, p. 30 (emphasis in original).
Accordingly, GASB 45 imposes no legal obligations on the State
30
(...continued)
health care benefits to term of agreement; however, promise of lifetime
coverage made in collective bargaining agreement prior to enactment of
that provision remained in effect).
Gen. 195] 223
with respect to the level or types of health care benefits accorded to
retirees or the financing of those benefits.31
2. Effect of Creation of Irrevocable Trust
Under GASB 45, assets transferred to an irrevocable trust “or
equivalent arrangement” that dedicates those assets to the financing
of retiree health care benefits and protects them from the employer’s
creditors are considered a payment in relation to the employer’s
ARC. (Other payments in relation to the ARC include funds actually
paid for health benefits and premiums paid to an insurer for that
year). GASB, Guide to Implementation of GASB Statements 43 and
45 on Other Postemployment Benefits, p. 32 (Question and Answer
100).
You asked whether the creation of a non-revocable trust fund
in response to GASB 45 would create a legal obligation to provide
retiree health care benefits. It is difficult to answer this question in
the abstract without the terms of a specific proposal.32 If the State
were to create an irrevocable trust for retiree health care benefits,
particularly one that consisted in part of employee contributions,
there may be a stronger argument that the State had undertaken a
contractual obligation to provide retiree health care benefits – or at
least to devote the funds in the trust to that purpose. Cf. 66 Opinions
of the Attorney General 56 (1981) (statute creating Fair Campaign
Financing Fund with voluntary contributions of taxpayers
established a trust and a contractual obligation of the State).
31
This does not mean that GASB 45 may not have a significant
impact on states and their finances. States will likely feel compelled to
comply with the accounting and disclosure standards established in GASB
- To the extent that compliance with GASB 45 results in a large
liability being added to a state’s balance sheet, the state may try to reduce
that liability in various ways to avoid adverse action by bond-rating
agencies. See Solomon, State, Local Officials Face Looming Health-Care
Tab, Wall Street Journal (November 23, 2005), p.A1; Fitch Ratings, The
Not So Golden Years – Credit Implications of GASB 45 (June 22, 2005),
p.2.
32
As outlined above, the General Assembly has created the
Postretirement Health Benefits Trust Fund to help finance retiree health
care benefits in the future. However, that Trust Fund is not irrevocable,
as its implementing law contemplates a possible termination of benefits
and reversion of funds to the general fund.
224 [90 Op. Att’y
III
Conclusion
In summary, it is our opinion that:
1. The State currently has a statutory obligation to
provide health care benefits to certain retirees; however, the statute
does not create a contractual obligation and the General Assembly
remains free to amend the law that provides such benefits. Although
the General Assembly may choose to confer a vested right in retiree
health care benefits, it has not done so. Even a contractual right to
health care benefits would be subject to modification if reasonable
and necessary to serve an important public purpose.
2. With respect to other states that, like Maryland, enjoy
the highest credit rating from the bond rating agencies, we found no
relevant case law. There are cases in other states that have reached
various conclusions; some of those decisions recognize a contractual
obligation to provide health care benefits to retirees. However, those
cases are of limited value in construing Maryland law as they are
based on the particular state constitution, statute, collective
bargaining agreement, or other circumstances peculiar to the case.
3. In contrast to retiree health care benefits, pension
benefits are contractual in nature. The statutes creating the various
retirement systems explicitly vest certain rights in retirees with
respect to the type and level of benefits, while the statute concerning
retiree health care benefits does not. Prior opinions of this Office
and court decisions confirm that the pension benefits are a
contractual obligation. The fact that the amount of a retiree’s
subsidy for health care benefits may be related to length of State
service does not alter this essential distinction.
4. Collective bargaining negotiations could result in
changes in the State’s legal obligations concerning retiree health
benefits, but only if the General Assembly specifically adopted those
changes.
5. GASB 45, as an accounting standard issued by a
private entity, does not itself impose any legal obligation on the State
concerning the level or funding of retiree health care benefits. Nor
does it express a preference for or prescribe the timing or the method
of financing retiree health care benefits. The creation of an
Gen. 195] 225
irrevocable trust to fund retiree health care benefits could be part of
a contractual undertaking of the State to provide those benefits. If
the trust fund consisted in part of employee contributions, there may
be a stronger argument that the State had undertaken to devote the
funds in the trust to retiree health care benefits.
J. Joseph Curran, Jr.
Attorney General
Bonnie A. Kirkland
Assistant Attorney General
Robert N. McDonald
Chief Counsel
Opinions and Advice
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