PENSIONS ‑- RETIREMENT ‑- PERS ‑- STATE TEACHERS' RETIREMENT SYSTEM ‑- LEGISLATURE ‑- CONTRACTS ‑- AUTHORITY OF LEGISLATURE TO MODIFY EMPLOYEES' PENSION PLANS

PENSIONS ‑- RETIREMENT ‑- PERS ‑- STATE TEACHERS' RETIREMENT SYSTEM ‑- LEGISLATURE ‑- CONTRACTS ‑- AUTHORITY OF LEGISLATURE TO MODIFY EMPLOYEES' PENSION PLANS
 
Unless accompanied by correlative new benefits and/or a demonstrable showing of necessity for the purpose of maintaining the integrity of the applicable pension system, a legislative act amending the statutes governing the computation of retirement allowances for members of the teachers' retirement system and the public employees' retirement system so as to (1) exclude from consideration any pay increases received by current active members of these two retirement systems after the effective date of such amendments or (2) reduce the levels of retirement allowances ultimately to be received by such members in all cases where the amounts payable to those members from the federal social security program are correspondingly increased, would be unconstitutional.
 
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                                                                    July 23, 1973
 
Honorable A. N. Shinpoch
Chairman, Legislative Budget Committee
Legislative Building
Olympia, Washington 98504
                                                                                                               Cite as:  AGLO 1973 No. 79
 
 
Dear Sir:
 
            This is written in response to your recent letter requesting our opinion as to the constitutionality of certain legislative proposals you have outlined with respect to the computation of pension benefits for persons who are presently participating as active members of either the Washington public employees' retirement system or the Washington state teachers' retirement system.  We paraphrase your questions as follows:
 
            (1) May the legislature constitutionally amend the statutes governing the computation of retirement allowances for members of the teachers' and public employees' retirement systems so as to exclude from consideration in the computation of those retirement allowances any pay increases received by current active members of these two retirement systems after the effective date of such amendments?
 
            (2) May the legislature constitutionally provide for a reduction of the levels of retirement allowances ultimately to be received by current active members of the teachers' or public employees' retirement systems in all cases where the amounts payable to those members from the federal social security program are correspondingly increased?
 
            We answer both of these questions in the qualified negative for the reasons set forth in our analysis.
 
                                                                     ANALYSIS
 
            The key to our answers to both your questions is the Washington supreme court's decision in Bakenhus v. Seattle, 48 Wn.2d 695, 296 P.2d 536 (1956).  In that case the court held that a pension granted to a public employee in this state is not a gratuity but is deferred compensation  [[Orig. Op. Page 2]] for services rendered on a contractual basis ‑ so as to be subject to Article I, § 23 of the state Constitution which provides that:
 
            "No bill of attainder, ex post facto law, or law impairing the obligation of contracts shall ever be passed."  (Emphasis supplied.)
 
            Under the rule thus adopted the court, accordingly, held that:
 
            ". . . the employee who accepts a job to which a pension plan is applicable contracts for a substantial pension and is entitled to receive the same when he has fulfilled the prescribed conditions.  His pension rights may be modified prior to retirement, but only for the purpose of keeping the pension system flexible and maintaining its integrity.  . . ."  (p. 701.)
 
            In so concluding the Washington court placed principal reliance upon two consolidated cases decided by the California supreme court a year earlier, Allen v. Long Beach and Alger v. Long Beach, 45 Cal.2d 128, 287 P.2d 765 (1955), from which it quoted with approval as follows:
 
            "'An employee's vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system.  [Citing cases].  Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change.  To be sustained as reasonable, alterations of employees' pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.  [Citing cases.]'"
 
            Without question, both of the proposals outlined in your letter would, if adopted by the legislature, result  [[Orig. Op. Page 3]] in disadvantage to present active members of the two state retirement systems.  Under both systems these members have a present statutory-contractual right to have their eventual retirement allowances calculated on the basis of a percentage of their two highest compensated consecutive years of covered service rendered during their overall periods of membership ‑ and not merely their current levels of compensation.  See, RCW 41.32.497 as to the teachers' retirement system and RCW 41.40.185 together with RCW 41.40.010 (15) as to the public employees' system.  And, likewise, the current members of these sytems who are also covered by federal social security have a present statutory-contractual right to receive retirement allowances from the state which are unrelated to the amounts of their eventual OASDI benefits.  See, in general, chapters 41.33 and 41.48 RCW.
 
            Because you have not yet incorporated the two proposals described in your letter into a complete bill for submission to the legislature, it is not possible here for us to determine whether these disadvantageous changes would be accompanied by any correlative new advantageous changes such, for example, as an equally advantageous reduction in the rate of employees' contributions or earlier eligibility for retirement.  Nor can we discern, in the abstract, from your letter whether the modifications proposed could be said to be necessary ". . . for the purpose of keeping the pension system[s] flexible and maintaining . . . [their] integrity . . ." within the meaning of the Bakenhus rule ‑ a concept which, unfortunately, was not very well explained by the court in that case itself.  Without an involvement of one or both of these factors in your ultimate bill, however, there can be no doubt in our minds that for the reasons stated by the court in the Bakenhus case, both of the disadvantageous changes outlined in your letter would be unconstitutional if applied to present employees who are members of either of the two subject state retirement systems.1/
 
             We trust that the foregoing information will be of some assistance to you.
 
Very truly yours,
 
SLADE GORTON
Attorney General
 
 
PHILIP H. AUSTIN
Deputy Attorney General
 
 
                                                         ***   FOOTNOTES   ***
 
1/On the other hand there would be no such constitutional problem with legislation designed to apply these modifications only to future employees of the state, its school districts or other political subdivisions.