To: Pres. Daryl Buhrman From: Michael P. May
Re: Pension Litigation Meeting
Date: September 16, 2019
At 4:00 PM today, Charles O. Monk, Esq lead plaintiffs' counsel, conducted an explanatory meeting as to the status of the current litigation.
The Court found that the City ordinance abolishing the variable annuity benefit constituted a breach of contract. The Court declined, however, to award specific performance, that is to say, to order the City to restore the variable annuity benefit on which our raises had been predicated. Instead, the Court ordered that the remedy consisted of awarding monetary damages that would place, in our case, the retirees in the same position financially as if the variable annuity benefit had never been taken away. In short, absent specific performance, which the court declined to award, the measure of damages is the amount in the reasonable contemplation of both parties to a contract at the time that the contract was entered into as the probable result of his breach.
The City enacted a replacement statute on a 0%/1 %/2% basis so that persons under 55 would not receive any raise, or COLA; persons from 55 to 65 would receive a 1% raise, or COLA, and persons above 65 would receive a 2% raise, or COLA. The damages stemming from the City's breach of contract would be calculated by figuring out the collective variable annuity benefit raise, reduced to present value and the 0%/ 1 %/2% raise, also reduced to present value and calculating the difference.
The difficulty is that some individuals could end up having been overpaid, in which case the concern was that the City would attempt to recoup the overpayment from those individuals, either all at once or incrementally. Thus, it was extremely difficult to draft an informative class action notice enabling individuals to determine whether to opt out of the class action.
Charlie Monk and the City's lead counsel, Jim Ulwick, had a conversation in the last week relating to the difficulty of drafting a class action notice in light of the dilemma posed by the City's potentially attempting to recoup overpayments from individuals. Mr. Ulwick told Mr. Monk that the City would not attempt to recoup any overpayment. That makes drafting the notice considerably easier.
If the City does not attempt to recoup any overpayment, there is no reason for any retiree to opt out of the class action litigation. To put matters in the language utilized by counsel, the City would not attempt to retrieve any "over-distribution" from any retiree. Thus, no one, if the City remains true to its word, would need to opt out to protect his or her interests, i.e., to avoid the City's attempting to get money back.
The amount of money is significant, even with the Court's having adopted the questionable methodology of the City's experts, a matter which will be appealed. Certainly, the younger retirees will fare better than the older because they would obtain more than if they were subject to the
00/0/1 %/2% formula.
The next question is obviously the length of time. As a practical matter, although the final draft of the class action notice is due on Wednesday, September 18, 2019, it is more likely than not that the Court will take as long as 90 days to decide upon the accuracy of the notice. In addition to that, it is patently obvious that, while Jim Ulwick is scrupulously honest, he is only communicating his understanding of the City's position with respect to recoupment. It frankly contradicts the logical conclusion to be drawn from the Court's earlier opinions. We thus will need a court order precluding the City from engaging in recoupment of any "over-distribution," and that will add to the time. From a practical standpoint, this aspect of the litigation, which should result in a final order, will not be achieved until the beginning of 2020.
Early in 2020, then, we should have a final, appealable, order. The City has already indicated an intent to appeal, and so have the police and firefighters. Normally, such an appeal would go to the Court of Special Appeals of Maryland, but the Court of Appeals of Maryland could, on its own motion, or on the motion of one or both of the parties, grant a petition for certiorari. It is too early to determine. Similarly, it is too early to determine when an appeal might be resolved and whether an appellate tribunal might remand the case to the Circuit Court for further proceedings consistent with whatever opinion the appellate court renders.
The trial court's denial of our request for specific performance is probably not vulnerable on appeal. The standard as to whether a trial court should grant specific performance is based on the trial judge's exercise of discretion. The appellate court, therefore, cannot reverse the trial court absent a showing of a clear abuse of that discretion, i.e., that no reasonable trial judge confronted with the same set of facts would reach the conclusion reached by the trial judge in this case. Frankly, I think that anyone making an argument that Judge Rubin abused her discretion in this case should have the song from Mission Impossible playing in the background.
While there have been significant developments and while it is clear that Charlie Monk, the other lawyers from his firm and the actuaries have worked extremely hard, it is impossible to predict when the resolution will occur, how much money, if any, individual retirees will receive and the form in which they will receive it, i.e., in a lump sum or in increments. Attempting to make predictions along those lines is the functional equivalent of attempting to catch smoke in a butterfly net.
Charlie handed out a draft notice, but it clearly needs refinement. In addition, the Court wanted an appendix as to damage calculations to accompany the notice, and that has not yet arrived.
TO: President Buhrman & BRPBA
From: Michael P.May
Date: May 14, 2019
Re: Cherry, et al. v. Mayor & City Council of Baltimore City (The Pension Litigation)
In the wake of Judge Rubin's 144-page Memorandum Opinion of May 1 3, 2019, one must necessarily have a concern as to whether any victory the Retirees obtained amounted to a pyrrhic or illusory triumph.
Those aggrieved by the passage of Ordinance 10-306, which eliminated the variable benefit, a method of calculating raises in pension benefits predicated upon market performance, sought, as part of its remedy, class action status and declaratory relief.
Maryland Rule 2-231 addresses class actions. In pertinent part it says, "One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. There naturally exist other considerations relating to judicial economy and consistency, and a class may, as in this case, be divided into subclasses with each subclass treated as a class. Rule 2-231 (d).
One of the latest judicial analyses of declaratory judgments appears in Hanover Investments Inc. v. Volkman, 455 Md. 1, 165 A.3d 497 (2017). Judge McDonald wrote, "The declaratory judgment action has been lauded as a 'simple judicial device for speedy adjudication of legal differences' that serves 'the important social function of deciding controversies
at their inception.
The opinion, involving a dispute between a Miss Utility company and former employee and shareholder, further explained, "The Maryland Uniform Declaratory Judgment Act is codified in Maryland Code, Courts & Judicial Proceedings Article ("CJ") Sec. 3-401 et seq. A declaratory judgment action — as the name implies — is a vehicle by which a person may obtain a judicial declaration 'to afford relief from uncertainty and insecurity with respect to rights, status and other legal relations.' CJ Sec. 3-402. The declaratory judgment action is designed simply to 'terminate the uncertainty or controversy giving rise to the proceeding' and is available whether or not corresponding legal right or relief is requested or even available. CJ Secs. 3-403 , 409. In other words, under the Declaratory Judgments Act, a party may seek a definitive statement of the 'correct answer' to a disputed question without asking that the court also enforce its decision by, for example, awarding monetary damages to the prevailing party or by ordering the mother party to act (or refrain from acting) in a certain way."
Judge Rubin decided the pension case against that legal backdrop. Initially she noted that there was an Order of January, 2018, relating to a Motion for Summary Judgment, seeking a finding, pursuant to Maryland Rule 2-501 that there was no genuine dispute as to any material fact and that the moving party was entitled to judgment as a matter of law, finding that Baltimore City, in enacting Ordinance 10-306, breached its contract with Plaintiffs Houser, Williams and Sledgeski and further that the city may make prospective and reasonable unilateral modifications F & P Retirement System. The May 13, 2019 Memorandum Opinion additionally noted that a resolution of whether the remedies available were amenable to class treatment called for a consideration of the basis and measure of damages. The Court decided whether the prospective (future) plan modifications in Ordinance 10-306 as to active-member plaintiffs Bob Cherry and Scotty Lake were reasonable. The Court also decided the measures of damages appropriate as to retired plaintiffs Houser and Williams and the eligible to retire plaintiffs such as Sledgeski. Then the Court went on to discern if the damages were subject to class and sub- class treatment and, if so, how so and on what basis.
The Opinion discussed a "hybrid class action." The analysis addressed whether, by adopting Ordinance 10-306, the City unlawfully diminished and impaired the pension benefits of plan members and beneficiaries and whether they were entitled to pre-Ordinance 10-306 benefits. In essence, therefore, there was a focus on whether the City unlawfully withdrew members' rights to the variable benefit and whether there was an entitlement to restoration of the variable benefit.
The Court certified the plaintiffs, active personnel not yet eligible to retire hired prior to the passage of Ordinance 10-306, retired personnel and active personnel eligible to retire had not yet done so as one class. Judge Rubin then broke that class into 3 subclasses: act to people not eligible yet to retire, retirees and active members eligible to retire.
The Findings of Fact ponion of the Opinion takes up 30 pages. It explains, among other concepts, the variable benefit, DROP, DROP 2 and smoothing. Notably, the Court states, "The Plan was unsustainable in its own right. The design of the Variable Benefit was fundamentally flawed from the start — posing a potential independent annual financial obligation unafflicted [sic] by past years' market performance and the impact such performance might have on the City' s ability to fund the basic benefit in any given year. The design made the Variable Benefit particularly ill-suited to operating the Plan in a volatile market."
The Opinion also noted that "Section 42 of Article 22 of the Baltimore City Code (both pre and post- 10-306) provides: 'Upon becoming either a Class A, a Class B, or a Class C member of the Employees' Retirement System, or upon becoming a member of the Fire and Police Employees' retirement system, established under this Article 22, such member shall thereupon be deemed to have entered into a contract with the Mayor and City Council of Baltimore, the terms of which shall be the provisions of this Article 22, as they exist at the effective date of this ordinance, or at the time of becoming a member, whichever is later, and the benefits provided thereunder shall not thereafter be in any way diminished or impaired."' It then pays homage to City of Frederick v. Quinn, 35 Md.App. 626 (1977) and Saxton v. Bd. of Trs. of the Fire and Police Employees Ret. Sys of Baltimore, 266 Md. 690 (1972). It states, "Saxton and Quinn make plain that a government employer is entitled unilaterally to modify a pension plan, including the benefits offered thereunder, provided such modifications are (l) prospective and not retrospective (i.e., provided the modification does not operate to divest a plan member of benefits already earned), and (2) reasonable. In determining whether a prospective modification is reasonable, a court must consider the following: (1) whether the modification 'was reasonably intended to preserve the integrity of the pension system by its actuarial soundness,' and (2) whether the modification causes a 'serious detriment' plan member.
The Memorandum Opinion additionally states, at page 85 that "inasmuch as Retired-Class members were entitled to, and receiving, Plan benefits as of the effective date of the Ordinance ..., the court is not persuaded by the City's argument that the Ordinance does not retroactively impair or diminish the rights or benefits of those Class members under the plan. " It then concluded, on the next page, that "Section 42 [of Article 22], as interpreted by Maryland common law, prohibits the City from retrospectively modifying the Plan such that a modification shall not remove, diminish or impair a Plan benefit where a Plan member had satisfied all defined contingencies related to such benefit prior to the effective date of the modification;... Members of the Retired and Retirement Eligible-Classes, having satisfied all the contractual condition precedent to receipt of benefits under the Plan prior to the adoption of Ordinance 10-306, held vested rights to Plan benefits that the City could not lawfully unilaterally diminish or impair;... By enacting Ordinance 10-306, the City retrospectively, and therefore unlawfully, withdrew from members of the Retired and Retirement Eligible-Places their rights to the Variable Benefit feature of the plan as it stood prior to the Ordinance; therefore,... by enacting Ordinance 10-306, the City breached its contract with members of the Retired and Ret.-Eligible Classes.
Often a complex trial evolves into a "battle of the experts." In this case, the court wrote, '[E]xpert witnesses Mr. Reese and Mr. Nadol [the City's experts] provided valuable guide to the court. The court found each of them, and their opinions expressed, credible and persuasive on the subject of the impact of the comparative differences of the pre-and post-10-306 Plan on the Class (and-Classes). Mr. England and Mr. Lowman [our experts] rendered opinions appropriate for and within their respective fields of expertise and otherwise consistent with Rule 5-702 [a rule of evidence pertaining to expert witness testimony]. Their testimony and ultimate opinions, however, were neither credible nor persuasive on the question of whether the post—10-306 Plan provides Active Sub- Class members substantially the Plan they bargained for at the start of employment." In short, the battle of the experts resulted in a resounding victory for the City.
At this point, it is worth noting that the Simon & Garfunkel song, The Boxer, contains the line, "A man hears what he wants to hear and disregards the rest." Certainly that proposition resonates with yours truly. Messrs. England and Lowman appeared capable, well-prepared and persuasive while Messrs. Reese and Nadol did not. Judge Rubin, however, formed a completely different opinion as to the persuasiveness and reliability of the respective experts' opinions, and her conclusion may not be disturbed absent a clear abuse of discretion — which simply did not happen in this case. In short, we are stuck with the opinions of the City's experts.
The Court additionally found that under-funding the F & P Pension Plan did not constitute a breach of contract. At the same time, the Court found that the plaintiff class and sub- classes, defined above, stated claims for relief within the context of the Declaratory Judgment framework.
The next issue, therefore, for retirees is the measure of damages. In that respect, at page 129 of the Memorandum Opinion, Judge Rubin wrote, "It is subject to the court's discretion whether to award money damages equivalent to the value of the withdrawn Variable Benefit (reduced to present value) or, alternatively, specific performance in the form of re-institution of the Variable Benefit. The court declines to declare that Retirement and Retirement-Eligible Sub- Class members are entitled to the benefits that existed immediately prior enactment of Ordinance 10-306; however, it is within the court's discretion to order such relief. Active Sub- Class members are not entitled to the benefits that existed immediately prior to the enactment of Ordinance 10-306, as the City lawfully modified their benefits under the Plan by way of the Ordinance. The Opinion went on to say, at page 130 that "the City was disallowed [as to retirees] from making changes to the Plan that removed, diminished or impaired those [variable] benefits, as those rights had 'vested absolutely. "'
The question clearly becomes what retirees will receive as a result of the City's breach of contract in removing the Variable Benefit. In that respect, Judge Rubin wrote," When a contract is breached, damages are recoverable 'such as may fairly and reasonably be considered, either as arising naturally, i.e., according to the usual course of things from the breach of contract itself, or as may reasonably be supposed to have been in contemplation of both parties, at the time they made the contract, as the probable result of breaching it.' Burson v. Simard, 424 Md. 318, 317 (2012) (quoting Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1845)). The former remedy is known as 'general damages'; the latter as 'special damages'or 'consequential damages.' General damages are understood as 'that sum which would place the plaintiff in as good a position as that in which the plaintiff would have been, had the contract been performed,' including losses incurred and the gains prevented. ' The Opinion then went on to state, "The Court, therefore, declines to award the Retired and Ret.-Eligible Sub- Classes specific performance in the form of reinstitution of the Variable Benefit to remedy the City' s breach of contract by enactment of 10-306. ... Instead, the court will award damages in the amount of the Variable Benefit each ofthose-Class members would have received ... from the effective date of 10-306 through the date of final judgment, as well as damages equal to the present value of the Variable Benefit increases to which these Sub- Class members (or their beneficiaries) would be entitled pursuant to the pre-10-306 Plan post-final judgment, if any.
In determining a formula to be utilized in calculating those damages, which effectively amount to a restoration of the fiscal status quo for retirees, the Court's opinion criticized Messrs. Lowman and England in finding that "City expert witness Adam Reese was credible, persuasive and helpful to the court on the issue of the appropriate assumptions, bases and projections to utilize in determining what damages, if any, the Retired and Retirement-Eligible Sub- Class members are entitled, both pre-and post-final judgment." The court then makes reference to Mr. Reese's report, not available to this writer at this point.
The Court concluded:" "The Court will, therefore, apply the City's proposed assumptions, projections and overall method of calculating Variable Benefits the members of the Return and Retirement-Eligible Sub- Classes would have received from the effective date of Ordinance 10-306 to the date of final judgment (including known FY 2010 through FY 2017 investment performance), and thereafter, reduced to present value. The pre-10-306 Plan will be treated as closed to new employees and retirees following June 3 0, 2010, and calculated damages will implement Mr. Reese ' s Variable Benefit averages based on his 20 trials [contained in his "corrected"Supplemental Expert Report, which this writer does not have], and shall be based on the amortization period and method in place in 2010."
In short, the City breached its contract with the Retirees by enacting Ordinance 10-306, which eliminated the Variable Benefit. The Retirees have no entitlement to restoration of the Variable Benefit. Instead, the Retirees have an entitlement to damages calculated by the City's expert.
The Court additionally ordered that all parties should jointly advise the court of 3 mutually available dates and times in June for a scheduling status conference to discuss the balance of the case. At this juncture, absent a crystal ball or a preternatural power of precognition, predicting what Retirees might receive as a result of the City's breach of contract is the functional equivalent of attempting to catch smoke in a butterfly net.
Judge Rubin's responses regarding the Pension Lawsuit, and our attorney, Mike May's response:
From: Mike May
Re: Pension Litigation
Date: January 2, 2018
Judge Rubin's opinion distinguishes 3 potential classes: (1) retirees, both ordinary and disability, (2) retirement-eligible members still on active duty and (3) active duty members not eligible to retire.
The decision relies upon City of Frederick v. Quinn, 35 Md. App. 626 (1977). That case recognizes pensions as contracts and says that pension benefits may not be retrospectively modified, i.e., the city may not take back pension benefits retirees, who have already fulfilled their obligations, have already earned, any more than a legislature may pass an ex postfacto, or retroactive, law.
For the retirees, who have already fulfilled their obligations, Judge Rubin found:
1. The City retrospectively, and therefore unlawfully, withdrew the retirees' rights to the variable benefit.
2. The retirees, having satisfied all the contractual conditions precedent (i.e., done everything necessary and fulfilled their obligations) to their right to receive the variable benefit prior to the adoption of Ordinance 10-306 (eliminating the variable benefit) held "vested interests to Plan benefits that the City could not unilaterally diminish or impair.'
3. By enacting Ordinance 10-306, the City breached its contract with the retirees.
4. The City is prohibited from unilaterally diminishing or impairing the retirees ' benefits because they have satisfied all the contractual contingencies necessary to receive retirement benefits under the Plan, i.e., they did everything they were supposed to do before the City reduced the benefits by eliminating the variable annuity.
5. The court decided the issue of"[Whether] the City is obligated to compensate members of the retired sub- class in accordance with the variable benefit provision of the Plan in place prior to the enactment of Ordinance 10-306." Id. The court's ruling was that the "Motion and Cross-Motion... are hereby DENIED." Id.
6. The court further ruled on the issue of "[Whether] the City is required to restore all Plan benefits that were unlawfully diminished or impaired through its enactment of Ordinance 10-306." The court wrote that the "Plaintiffs orally withdrew their Motion as to [the request that the variable annuity benefit be restored]."
In essence, the court decided, as to the retirees, (1) that there was a contract, (2) that Ordinance 10-306 breached the contract, (3) that Ordinance 10-306 eliminated the variable annuity benefit but (4) the measure of damages was not restoration of the variable annuity benefit to the retirees. The decision did not, on my rapid reading, set forth what an appropriate measure of damages for the retirees was.
In breach of contract cases, Maryland follows the rule of Hadley v. Baxendale, 9 Exch. 341 , 156 Eng. Rep. 145 (1854) which says that in a lawsuit for breach of contract, the plaintiff may recover those damages which naturally arise from the breaking of the contract. Those damages are the consequences of breaking the contract which the defendant had reason to foresee would take place or such damages as may reasonably be supposed to have been contemplated by both parties when they made the contract as the probable result of its breach. See, e.g., Hoang v. Hewitt Ave. Assocs., LLC, 177 Md. App. 562, 594, 936 A.2d 915, 934 (2007). At this point, therefore, we do not know the damages to which the retirees are entitled as a result of the city's breach of his contract. Moreover, I do not know the basis ofthe court's denial of the motion arguing that the city is required to compensate the retirees in accordance with the variable benefit provision of the Plan in place before the enactment of Ordinance 10-306. I further do not know the rationale for the plaintiffs' withdrawal of their motion requesting the restoration of the variable annuity benefit.
The bottom line is that the court held, as to the retirees, that Ordinance 10-306 was a breach of contract, but it did not set forth the damages to which the retirees are entitled. Nor did it set forth the methodology the Court would use to determine those damages.
Michael P. May
January 2, 2018
As posted by Lisa Riha...
Below is an update from Mr. Robert Klausner concerning our ongoing pension litigation. Mr. Klausner is the Baltimore Fire Officers pension attorney:
Last week, the lawyers held a phone conference with the Court to agree on a replacement for a retired class member who has passed away since the litigation began. The Judge and the lawyers discussed standards for certifying the case as a class action. The Plaintiffs will file an amended complaint with the Court adding the new name before December 13th. The Judge advised that she is working on an order to determine the issues raised at the November 2nd hearing and will provide it as soon as she has completed it. The Union will advise the membership as soon as the order is provided.
As posted by Lisa Riha...
*Pension Litigation - Update***
Below is from Mr. Robert Klausner, Fire Officers L-964`s pension attorney:
A hearing was held on November 2, 2017 in Baltimore Circuit Court before Judge Julie Rubin in the pension litigation. After an exchange of briefs that began during the summer, the City and the Unions each argued to the Court the merits of their cases. The hearing was on cross motions for summary judgment (meaning motions filed by both sides stating the Court could decide the issue on the law). As the 7 hour hearing progressed, the discussion focused on Maryland law as it related to pension as a contract and the language of Article 22, Section 42 of the Baltimore City Code. The members took the position that no changes are permitted in the plan after employment commences. The members further argued that even if changes could be made for active employees, any new plan must be substantially equivalent in value to the plan in effect on the date of hire. The City took the position that it had a reserved right to change the pension contract. Judge Rubin took the matter under advisement and a written order is expected shortly. FOP#3 and Firefighters Local 734 was represented by pension attorney Saul Ewing.
As posted by Lisa Riha FOP Secretary:
"The lawyers for the employee and retiree groups and lawyers for the City met with Judge Julie Rubin in the Baltimore Circuit Court to set scheduling for the case. In the hour long discussion concerning records from the federal case, the issues to be decided and schedules, the Court directed that the parties both file motions for summary judgment on the key legal issues that will determine the rights and liabilities of the parties including the meaning of Section 42 of the City Code (the contract provision). All memos of law will be filed over the next few months and the Court set October 30 at 9 AM for oral argument on the motions. As pleadings are filed they will be posted on the union website."
As many of you are aware, the pension lawsuit has been on hold. We are currently waiting for a State Court judge to be assigned to our case. The BRPBA, FOP, Fire Union and Retired Firefighters are also currently trying to set up an appointment to meet with the current Mayor. We will keep you informed.
On November 24, 2015, Nick Caprinolo and Mike May, among others, met with Charlie Monk and Devin Doolan of Saul Ewing in a meeting restricted to retirees. After the 2014 reversal of Judge Garbis' decision, the City has rebuffed every effort to resolve the F&P pension issue through negotiations.
Because so much time has passed, review would help.
On September 6, 2011, Judge Garbis rendered his second trial decision in Cherry v. Mayor and City Council of Baltimore City, 2011 WL 11027560 (D. Md. 2011). The judge wrote:
The Variable Benefit feature was in effect from 1983 through 2009. There was an investment return rate in excess of 7.5%, hence a Variable Benefit increase, in 17 of those 26 years..... the actual Variable Benefit increase received during those years was the equivalent of a 3% increase in each of those 26 years.
Ordinance 10-306, effective June 30, 2010, made several changes to the Plan, including elimination of Variable Benefit increases. Consequently, no Variable Benefit increase was provided for the fiscal year of July 2009 through June 30, 2010 although the rate of return for the year would have resulted in such an increase. However, the Ordinance added an age-dependent post-retirement benefit enhancement (Cost of Living Adjustment, or "COLA") feature. The age-based COLA provides for a 0% fixed annual benefit adjustment for eligible members and beneficiaries below the age of 55, a 1% adjustment for retirees from age 55 to 64, and a 2% adjustment for retirees age 65 and older.
Then, Judge Garbis set forth how he conducted his analysis of whether Ordinance 10-306 violated the Contracts Clause of the United States Constitution:
The Contract Clause, Article I, § 10 of the United States Constitution provides "No State shall ... pass any ... Law impairing the Obligation of Contracts." The Contract Clause does not literally prohibit any Legislative action that impairs government or private contracts.
United States Trust Co. of NY v. New Jersey, 431 U.S. 1, 21 (1977). Rather, there exists a well-established analysis for determining whether a legislative action implicates and violates the Contract Clause. See Fraternal Order of Police Lodge No. 89 v. Prince George's County, 608 F. 3d 183, 188 (4th Cir. 2010). This analysis balances and harmonizes the protections of the Contract Clause with the states' reserved police powers ''to provide for the welfare of their citizens."
Baltimore Teachers Union v. Mayor and City Council of Baltimore, 6 F.3d 1012, 1015 (4th Cir. 1993)....
Accordingly, in order to implicate the protection of the Contract Clause, it must first be established that (1) a contractual obligation exists, (2) the legislation retroactively impairs the contractual obligation, and (3) such impairment is substantial. If there has been substantial impairment, the legislative action will, nevertheless, be permissible if it is reasonable and necessary to serve an important public purpose....
Judge Garbis then concluded (1) that the Entitled Group of plaintiffs, those fully entitled to and receiving benefits under the plan, sustained a substantial retroactive impairment in the contract Clause Context of their right to the Variable Benefit feature, (2) that the Eligible Group, those eligible to retire but not entitled to receive benefits because they were still working, sustained a substantial retroactive impairment in the Contract Clause context of their right to the Variable Benefit feature with respect to benefits based upon service prior to the effective date of Ordinance 10-306 and that the Pre-Eligible Group, those members of the Plan who, as of the effective date of Ordinance 10-306, were working and not yet eligible to receive benefits, did not sustain any substantial retroactive impairment in the Contract Clause context.
The United States Court of Appeals for the Fourth Circuit vacated Judge Garbis Contract Clause decision and order in Cherry v. Mayor and City Council of Baltimore City, 762 F.3d 366 (4th Cir. 2014), holding that the City's substitution of the COLA for the Variable Benefit did not violate the Contract Clause at 372-73. Judge Keenan wrote:
A state or municipality does not "impair the obligation of contracts" merely by breaching one of its contracts or by otherwise modifying a contractual obligation....If the plaintiffs retain the right to recover damages for breach of contract, there is no impairment of contract under the Contract Clause....In the present case, the Ordinance neither prevents the plaintiffs from pursuing a state law breach of contract claim nor shields the City from its obligation to pay damages should it be found in breach of contract....
Under Maryland law, the contract or vested rights of employees "are subject to a reserved legislative power to make reasonable modifications in the plan or indeed to modify benefits if there is a simultaneous off setting new benefit...." See City of Frederick v. Quinn, 35 Md. App. 626, 371 A.2d 724,726 (1977). To qualify as a "reasonable modification," a revised plan must provide the employees with "substantially the program bargained for and any diminution thereof must be balanced by other benefits or justified by countervailing equities for the public's welfare."....In articulating this rule, the Court of Special Appeals of Maryland recognized that the needs of the government may change over time as new employees draw on pension funds, requiring modifications to ensure the "soundness of the fund." ....
The reasonable modification principle articulated by Maryland's courts verifies that the plaintiffs have an opportunity to litigate a breach of contract claim under state law. If the City's defense is unsuccessful and a court determines that the City has a contractual duty to the members and that the modification of the plan is unreasonable under Maryland law, the plaintiffs may be entitled to relief. Because the Ordinance does not foreclose any such claim by the plaintiffs, the City has not extinguished the plaintiffs' remedy under state law by enacting the Ordinance. Accordingly, the plaintiffs do not have a viable Contract Clause claim at 371-72.
In short, the Fourth Circuit held that Ordinance 10-306 did not violate the Contract Clause because the plaintiffs have a state breach of contract remedy under the Quinn case. That case, however, held that the change brought about by a law diminishing contract benefits must only be reasonable, not reasonable and necessary.
Nonetheless, the Quinn case actually benefits the retirees. It distinguishes between personnel still on active duty and personnel who have already retired. Under Quinn, when the event triggering an obligation on the part of the City to pay benefits, a member's retirement, occurs, the City may not go back and diminish benefits it already had an obligation to, and had begun to pay.
Clearly, therefore, the retirees have a much stronger breach of contract claim under Quinn than do personnel still on active duty. At the same time, the damages to which they would be entitled are significantly higher than any damages active duty people could claim for breach of contract. For active duty people, the situation, from a state law standpoint is just the opposite. For both active and retired personnel, the damages for breach of contract are money or a benefit equivalent to that which Ordinance 10-306 took away.
Settlement of the case during the current administration is not likely. During the last nine months, serious settlement discussions occurred because Mayor Rawlings-Blake thought she would run for reelection. She changed her mind in the wake of the Freddie Gray disturbances. As a result of the inevitable stagnancy her status creates, coupled with rather large gaps in the City's comprehension of the issues, resolution outside the court before the next election most likely will not occur.
Additionally, disagreement over whether a state or federal court should address the state breach of contract claim also exists. In Cherry v. Mayor and City Council of Baltimore City, the Fourth Circuit stated in the opinion's last footnote:
The plaintiffs may attempt to refile in the district court their state law claims that were dismissed without prejudice, or they may initiate proceedings in state court alleging breach of contract under Maryland law. If the plaintiffs choose to pursue either of these two courses of action, the district court may wish to hold any proceedings regarding the Takings Clause [government may not take property without justly compensating its owner] claim in abeyance pending the resolution of related contractual issues at 374, n.6. The City wants any state breach of contract claim decided in the Circuit Court for Baltimore City while the plaintiffs prefer the Federal Court, where the case has been for the last five years. Because the Takings Clause claim still exists, although it was not litigated, the federal court may still exercise jurisdiction over the state breach of contract claim under a theory of supplemental jurisdiction. It is within Judge Garbis' discretion as to whether he keeps the case.
Currently Judge Garbis has a status conference scheduled for December 2, 2015, and that could provide some clear indication as to the case's future.
Possibly, the retirees could file a motion for the court to enter judgment for them on their state breach of contract claim because the retirees have already done all the City asked, as is clear from their status as retirees. At this point, it is too early to tell when the court would rule on any such motion, much Jess when it would be filed.
At this point, all mayoral candidates need to have an understanding of the issues in litigation, something the current administration lacks. To that end, Saul Ewing is preparing a briefing paper for the candidates as to the issues. Once the candidates have the paper, the retirees can interview them as to their positions. The result of those interviews should assist the retirees in determining whether a particular candidate merits support.
Also, Saul Ewing will draft legislation espousing and/or mirroring the retirees' position. Such legislation naturally draws attention to the issues and provides an additional forum for retirees and actives to advance their positions as to the F&P Pension and the Ordinance 10-306 Changes.
Also, another recent development affects the retirees' pension. On November 20, 2015, Commissioner Davis sent a letter to Baltimore PD employees who had retired within the last five years recruiting them to rejoin the Police Department, which is alarmingly short of personnel apparently. Their pension benefits would be suspended until they retire again. But when they do so, they would receive a large increase in their pensions. That affects the F&P's solvency and thus inures to the current retirees' detriment. It also would likely limit the retirees' options and approaches to settlement.
Michael P. May
Follow the links below for information about the City of Baltimore 2010 Pension Ordinance and subsequent court rulings