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Duncan v. Retired Public Employees of Alaska (6/13/2003) sp-5698
Duncan v. Retired Public Employees of Alaska (6/13/2003) sp-5698
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
JIM DUNCAN, Commissioner, Alaska )
Department of Administration, ) Supreme Court
No. S-10377
GUY BELL, Director, Division of )
Retirement and Benefits, and STATE )
OF ALASKA, )
) Superior Court Nos.
Petitioners, ) 3AN-00-7540 CI
Consol. with
) 3AN-00-7834 CI and
v. ) 3AN-00-8213 CI
)
RETIRED PUBLIC EMPLOYEES OF )
ALASKA, INC., ALASKA AFSCME )
RETIRED CH. 52, WILLIAM T. BRYANT, )
JOHN HARRIS, individually and as class ) O P I N I O N
representatives, and NATIONAL )
EDUCATION ASSOCIATION, )
NATIONAL EDUCATION ASSOCIATION )
RETIRED, JEANNE BRADNER, JOYCE )
HAMMONDS, EDWARD SHELLINGER, )
and JOHN and JANE DOES 1-3, for )
themselves and other similarly situated, ) [No. 5698
- June 13, 2003]
)
Respondents. )
)
Petition for Review from the Superior Court
of the State of Alaska, Third Judicial
District, Anchorage, Mark Rindner, Judge.
Appearances: Kathleen Strasbaugh, Assistant
Attorney General, Bruce M. Botelho, Attorney
General, Juneau, for Petitioners. Don
Clocksin, Don Clocksin Law Office, Olympia,
Washington, for Respondent NEA-AK. Bradley
D. Owens, Jermain, Dunnagan & Owens, PC,
Anchorage, for Respondent RPEA. Jay W.
Trumble, Anchorage, for Respondent ASEA Local
52.
Before: Matthews, Eastaugh, Bryner, and
Carpeneti, Justices. [Fabe, Chief Justice,
not participating.]
MATTHEWS, Justice.
I. INTRODUCTION
Article XII, section 7 of the Alaska Constitution
protects retirement benefits of public employees from
diminishment or impairment. But benefits may be changed if any
detriments are offset by advantages. The main question here is
whether as to changes in health insurance plans this balance must
be struck taking the perspective of each individual or the group.
We conclude that the group perspective must generally be used
because individual evaluations are subjective and uncertain.
II. FACTS AND PROCEEDINGS
In 2000 three retiree organizations and individual
members (collectively "the retirees") brought separate lawsuits
against Bob Poe,1 Commissioner of the Alaska Department of
Administration; Guy Bell, Director of the Alaska Division of
Retirement and Benefits; and the State of Alaska (collectively
"the state"), alleging, in part, that changes made to the state's
group health insurance plan for retired public employees in 1999
and 2000 violated article XII, section 7 of the Alaska
Constitution by diminishing accrued benefits. The cases were
consolidated and then certified as a class action. The classes
consisted of more than 20,000 retired persons eligible for
retirement benefits under Alaska's Public Employees' Retirement
System2 (PERS) and Teachers' Retirement System3 (TRS). The
background of these suits is set out in the following paragraphs.
In 1975 the state began paying premiums for major
medical insurance for PERS and TRS retirees.4 The coverage was
subject to deductibles, co-payments, and maximum limits. When it
was first instituted, and periodically thereafter, state
publications advised state employees that the benefits would be
provided and paid by the state during their retirement.5 Changes
in the insurance were made periodically: services were added,
precertification was required as a cost-saving measure, and co-
payments were changed. In 1986 for PERS and 1990 for TRS
substantial changes were made by lowering benefits and increasing
the retirement age for employees starting work after these dates.
The changes thus resulted in a second tier of retirees.
In 1998 a number of retirees requested that the state
update the retiree health plan. The respondent, Retired Public
Employees of Alaska, suggested a number of coverage changes. The
state was not opposed to changing the plan but sought to achieve
"cost neutrality" by balancing cost-increasing changes with cost-
saving changes.6 After a substantial process of consultation,
the state in 1999 and 2000 made a number of changes to the plan.
Some of the changes provided greater benefits; others were
disadvantageous to retirees.7
The retirees were dissatisfied with these changes and
sued the state, seeking a declaration that the changes amounted
to an impermissible diminishment of accrued benefits under
article XII, section 7 of the Alaska Constitution. They also
sought an injunction against any modification that required
retired public employees "to pay any costs for medical benefits
without providing sufficient comparable new advantages that
constitute an effective offset for any such costs." Finally,
they sought damages for retired public employees "for the costs
they have incurred or paid after the modifications." After
substantial discovery both parties moved for summary judgment.
Superior Court Judge Mark Rindner granted the retirees' motion
for summary judgment and denied the state's cross-motion.8 The
court deferred ruling on remedies pending further briefing.
Meanwhile, the state petitioned this court for review of the
superior court's decision on summary judgment, and we granted the
state's petition.
III. STANDARD OF REVIEW
We review a grant of summary judgment de novo.9
Summary judgment is proper if there are no material facts in
dispute and the moving party is entitled to judgment as a matter
of law.10 "The proper interpretation of a constitutional
provision is a question of law to which this court applies its
independent judgment."11
IV. DISCUSSION
The state makes several arguments, but only three are
within the scope of the summary judgment order of the superior
court. This opinion is restricted to these arguments. They are:
(1) Article XII, section 7 of the Alaska Constitution does
not encompass health insurance benefits;
(2) Alternatively, if article XII, section 7 encompasses
health insurance benefits, it only requires that premiums paid on
behalf of the retirees not be diminished; and
(3) Alternatively, if article XII, section 7 encompasses
health insurance benefits and guards against more than a
reduction in premiums, changes in benefits are permissible so
long as disadvantages resulting from such changes are balanced or
outweighed by advantages and that this calculation must be made
from a group rather than an individual perspective.
For reasons that are similar to those expressed by the
superior court, we reject the first two arguments made by the
state. But we agree with the state's third argument for the
reasons expressed below in part D.
A. Article XII, Section 7 Overview
Article XII, section 7 of the Alaska Constitution
provides:
Retirement Systems. Membership in employee
retirement systems of the State or its
political subdivisions shall constitute a
contractual relationship. Accrued benefits
of these systems shall not be diminished or
impaired.
Under this section, retirement benefits are "regarded as an
element of the bargained-for consideration given in exchange for
an employee's assumption and performance of the duties of his
employment."12 "[A]n employee's rights to benefits under
[retirement] systems . . . vest on employment and enrollment in
the system" rather than "at the time when an employee becomes
eligible to receive those benefits."13 This means that system
benefits offered to retirees when an employee is first employed
and as improved during the employee's tenure may not be
"diminished or impaired." But this prohibition does not mean
that vested benefits cannot be altered. Reasonable modifications
are permissible. But to be sustained as reasonable, changes that
result in disadvantages to employees should be accompanied by
comparable new advantages.14
These principles are not in dispute. What is disputed
is whether the term "accrued benefits" in article XII, section 7
includes health insurance benefits and if so how to apply the
"diminished or impaired" prohibition to challenged changes in
coverage.
B. Article XII, Section 7 Includes Health Insurance
Benefits.
When construing the constitution, our objective is "to
give effect to the intent and purpose of the framers of the
constitutional provision and of the people who adopted it.
Unless the context suggests otherwise, words are to be given
their natural, obvious and ordinary meaning."15 In the present
case there is little question that the phrase "accrued benefits"
as used in article XII, section 7 of the Alaska Constitution, if
given its natural and ordinary meaning, would encompass health
insurance benefits offered to public employee retirees.
The state argues that since health insurance benefits
were not provided by territorial retirement systems when the
Alaska Constitution was drafted and ratified, they were not meant
to be included within the term "accrued benefits." The state
also argues that practical considerations counsel against the
inclusion of health insurance benefits as constitutionally
protected accrued benefits. The state observes that Congress
when enacting the Employment Retirement Income Security Act
(ERISA) decided not to impose vesting requirements on medical
insurance plans because so doing would "seriously complicate the
administration and increase the cost of plans whose primary
function is to provide retirement income."16 According to the
Third Circuit:
Automatic vesting was rejected because the
costs of such plans are subject to
fluctuating and unpredictable variables.
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 the cost of
treatment independent of inflation. These
unstable variables prevent accurate
prediction of future needs and costs.[17]
We find the state's historical argument unpersuasive.
The term "accrued benefits" is used in article XII, section 7
without limitation, suggesting that whatever benefits might be
provided by state retirement systems were meant to be covered.
Nothing in the text of article XII, section 7, nor in the history
of the Constitutional Convention, suggests the founders intended
to limit "accrued benefits" to the particular types of benefit
being provided by territorial retirement systems at the time of
ratification of the constitution.
Our case law suggests that "accrued benefits" should be
defined broadly. In Hammond v. Hoffbeck we held that death
benefits payable to the beneficiaries of retirees were
encompassed.18 We stated:
The fact that part of an employee's benefit
package is, effectively, a life insurance
policy, the proceeds of which will never be
received by the employee, does not make that
whole package any less an element of the
consideration that the state contracts to
tender in exchange for services rendered by
the employee.[19]
To paraphrase the above language, medical insurance is also part
of an employee's benefit package and the whole package is an
element of the consideration that the state contracts to tender
in exchange for services rendered by the employee. Similarly, in
Sheffield v. Alaska Public Employees Association, Inc., we
referred to protected rights and benefits as a "whole complex of
provisions."20 In Municipality of Anchorage v. Gentile one
question was whether retirement medical benefits negotiated
between the municipality and a union were intended to be vested.21
Evidence indicated that the parties intended the negotiated
benefits to be the same level and type of medical benefits
received under PERS. We reasoned that since "PERS benefits are
vested, it is fairly inferable that the parties also intended the
[negotiated] benefits to vest."22
We conclude that the term "accrued benefits" is not
limited to just the benefits that were provided to public
employees at the time of ratification of the constitution.
Instead, the term includes all retirement benefits that make up
the retirement benefit package that becomes part of the contract
of employment when the public employee is hired, including health
insurance benefits.23 Some states have reached different
conclusions. See, e.g., Colorado Springs Fire Fighters Ass'n,
Local 5 v. City of Colorado Springs, 784 P.2d 766, 770-73 (Colo.
1989) (finding that city ordinance providing health benefits for
retired city employees did not create vested, contractual pension
right to receive benefits); Musselman v. Governor, 533 N.W.2d 237
(Mich. 1995), modified, 545 N.W.2d 346, 347-48 (Mich. 1996)
(concluding upon rehearing that the "financial benefits"
protected by state constitution did not necessarily include
health benefits); Davis v. Wilson County, 70 S.W.3d 724, 727-28
(Tenn. 2002) (holding that health care benefits did not vest and
could be terminated absent clear intent for them to vest).
With respect to the state's argument that practical
considerations should lead to a narrow construction excluding
health benefits from constitutional protection, we acknowledge
that medical costs are rapidly rising, making health insurance
increasingly difficult to provide. But we do not believe that
this fact is of sufficient weight to change the meaning of the
plain language of article XII, section 7.
C. Article XII, Section 7 Does Not Merely Protect
Against the Diminishment of Premium Payments Made on
Behalf of Retirees.
The state argues that "[r]etirees should be limited to
whatever the dollar contribution in force at the time of his/her
retirement can purchase." The state's argument, in other words,
is that the accrued benefit that is constitutionally protected is
the highest monthly premium paid by the public employer during
the employee's employment, rather than the coverage provided.
The state cites no authority in support of this argument, but
offers practical reasons:
The principal policy consideration is the
ever-increasing cost of health care, which
over the years has risen at a rate far
greater than the rate of inflation.
. . . .
. . . [I]t is obvious that a requirement that
the retirement systems maintain the current
level of services - or a requirement that
cost-saving changes to the current plan be
balanced by enhancements of equal cost - has
the potential to put severe strains on the
systems, jeopardizing their ability to pay
any benefits.
The retirees argue that the plain language of article XII,
section 7 is contrary to the state's position. They also contend
that the representations made in employee handbooks over the
years conflict with the state's current position.
We believe that the retirees have the better of this
argument. The natural and ordinary meaning of "benefits" in a
health insurance context refers to the coverage provided rather
than the cost of the insurance. Further, the various employee
publications promise coverage, not merely payment of a particular
premium.24
The state's argument that the pension system may at
some point be threatened by increasing costs of health care is a
serious one. Again, however, we do not believe that this
argument is sufficient to change the meaning of the
constitutional language in question.25
D. Whether Health Insurance Benefits Have on Balance
Been Diminished or Impaired Must Be Measured from a
Group Rather than an Individual Standpoint.
As already noted, in Hammond v. Hoffbeck we held that
the prohibition on diminishment or impairment of retirement
benefits does not mean that retirement benefits are unchangeable.
Instead, benefits can be modified so long as the modifications
are reasonable, and one condition of reasonableness is that
disadvantageous changes must be offset by comparable new
beneficial changes.26
In Hoffbeck we held that determinations of whether
detrimental and beneficial changes are sufficiently in balance
should be made on a member-by-member basis, rather than
collectively.27 The state challenges the application of an
individualized approach in the context of health insurance,
arguing that such an approach is unworkable:
With a health insurance plan, it makes
no sense to balance advantages and
disadvantages to an individual at a
particular moment in time, because one never
knows what one's health will be from one
moment to the next. . . . The retirees'
approach as set out in affidavits is that if
a member isn't presently using an offered
benefit, that benefit cannot be considered an
enhancement of the plan, and can't offset a
disadvantage. This is anathema to the
concept of major medical coverage. The
purpose of a group plan is to spread risk
among individuals both healthy and sick, and
over the course of time, for an individual
and . . . family both when they are sick and
when they are well.[28]
The retirees do not directly respond to the state's argument that
taking an individualized approach to balancing benefits and
detriments is unworkable. But the retirees do offer examples of
a number of individuals who claim to have been harmed by the
changes to the plan.
We refer to one as an example. R.D., a retired
teacher, who is in his early fifties, has had his maximum co-pay
amount increased from $690 to $800 per year, an increase of $110.
Whereas he paid $4 each for brand name prescriptions under the
old plan, he now must pay $8 and refuses the mail-order
prescription service because he prefers a face-to-face
relationship with his pharmacist. He is skeptical of the value
of the improvements personally to him since he has never needed
reimbursement for travel, feels that he is unlikely ever to reach
a lifetime maximum of over $1 million, and will not qualify for
Medicare (at age sixty-five) for a long time, and thus he feels
that the most significant benefit of the new system, 100% of
covered expenses not paid by Medicare, will be of questionable
benefit to him.
R.D.'s affidavit well illustrates the state's point.
For reasons of personal choice, R.D. chooses not to avail himself
of the mail-order service savings; because he does not now have a
condition that requires him to travel to obtain medical
treatment, he believes that the new travel benefit will be of no
benefit to him; because his treatment costs are not now
approaching a maximum of $1 million, he believes that the
increased cap of $2 million will not be of help to him; and
because he is in his early fifties he has difficulty appreciating
the value of increased Medicare coordination benefit. R.D.'s
judgment that the benefits of this new system are of little value
to him are subjective and rooted in the present. The benefits
will have value to him, for example, if he chooses to use the
mail-order drug service; if the conditions of his health change
so that he must travel to receive treatment or receives treatment
costing more than $1 million; or if he reaches the age of sixty-
five. R.D.'s opinion that the detriments of the new plan exceed
its benefits to him are incapable of objective verification29 and
review of his affidavit seems to illustrate the truth of the
state's point that using an individualized approach in evaluating
changes to health insurance plans is unworkable.
In Hoffbeck we applied the individualized approach to
PERS changes that reduced occupational disability benefits and
occupational death benefits. As to the reduction in death
benefits, there was no offsetting advantage.30 As to the
reduction in disability benefits, the reduction was substantial,
from two-thirds to two-fifths of monthly salary.31 The claimed
offsetting advantages were that workers' compensation awards
recovered by disabled employees were previously setoff against
disability benefits whereas under the new system there was no
setoff.32 We noted, however, that more than half of the employees
disabled prior to the change received no workers' compensation
benefits.33 Two of the affiants had suffered disabling injuries.
We stated that in these cases "serious hardship has resulted from
application of the new system and . . . no corresponding
advantages have reduced that hardship."34
Hoffbeck relied principally upon Betts v. Board of
Administration of the Public Employees' Retirement System.35
Betts involved a change in the formula for calculating pension
payments. The plaintiff in that case was a retired state
employee who was disadvantaged by the change.36 It was possible
to determine with certainty that he received no offsetting
comparable advantage. The difference was substantial since the
controversy was whether his pension should be calculated on the
basis of his highest salary while in office, $21,499, or on the
basis of the current salary for the office in question, which was
$35,000.37
Hoffbeck and Betts are distinguishable from the current
case. Changes to fixed streams of income such as occupational
disability and pension payments can be much more readily
evaluated on an individual basis to determine whether they result
in a net benefit than can changes to health insurance. Pension
and occupational disability payments are, for the most part,
predictable and fixed, while health insurance benefits change
according to the unpredictable, changing medical needs of each
individual. This difference suggests that the Hoffbeck
individual assessment approach may be generally inappropriate
with respect to health insurance.
A Michigan circuit court opinion has recognized the
special problems that would result if health insurance benefits
could not be changed:
Plaintiffs seek a legal bulwark against
any diminution of any portion of their
current health benefits. . . . [T]his
implies a set of health benefits frozen in
time . . . .
. . . .
It is self-evident that such an outcome
would produce a huge chilling effect on the
State's willingness to grant any health
benefits to future retirees, because the
costs of any such benefits are likely to
increase over time, yet the State would have
no authority to impose new cost containment
measures, as it has sought to do here. And
even the existing retirees would have earned
a Pyrrhic victory, as their "frozen" health
benefits become more obsolescent with each
passing year.[38]
In view of the ever changing nature of medical care, the Michigan
court observed that "[t]he idea of a specific bundle of medical
benefits, unchanging over time, . . . is probably illusory."39
Yet the court held that the state was not free to radically
change the nature of health benefits that had vested in the
employee group in question. The court concluded:
[T]he rights which have vested in Plaintiffs
are not rights to receive exactly the same
package of health benefits which were offered
[at vesting] but rather a right to a
reasonable health benefit package, one which
is in keeping with the mainstream of such
packages, as they are negotiated and
implemented for similarly situated active
employees over time. This - not a "frozen"
package of benefits and cost containment
measures - is the meaning of "hospital,
medical-surgical, and sick care benefits"
mandated by the Legislature. This is the
"central undertaking" to which Plaintiffs
could reasonably believe they have
entitlement, based on the State's promise.[40]
Like the Michigan circuit court, we believe that health
insurance benefits must be allowed to change as health care
evolves. We also believe that the economic realities of
administering health care coverage would prevent making such
changes if an individualized equivalency analysis were used. We
reach this conclusion reluctantly in light of Hoffbeck's holding
that changes in other retirement benefits must be analyzed on an
individual basis, a result that is implied by article XII,
section 7, which equates retirement benefits with contract
rights. Recognizing that analysis of health insurance changes
from a group standpoint is necessary, but in some degree
inconsistent with analogous constitutionally based precedent, we
believe that it is advisable to express a number of cautions that
may help to guide any equivalency analysis of health coverage
changes.
At the outset, we reiterate Hoffbeck's admonition that
equivalent value must be proven by reliable evidence. Just as
with an individual comparative analysis, offsetting advantages
and disadvantages should be established under the group approach
by solid, statistical data drawn from actual experience -
including accepted actuarial sources - rather than by
unsupported hypothetical projections.41 We also believe that,
apart from the individualized approach, the other guidelines
concerning equivalency analysis set out in Hoffbeck should
continue to be generally applicable.42 Further, we reiterate that
equivalent value must be proven by a comparison of benefits
provided - merely comparing old and new premium costs does not
establish equivalency.43
Where there is an individual showing that a change
results in a serious hardship that is not offset by comparable
advantages, the affected individual should be allowed to retain
existing coverage. This is suggested by a distinction between
Hoffbeck and the present case. In Hoffbeck the detrimental
change resulted in clear and specific "serious hardship" to
certain individuals.44 By contrast, the examples that have been
offered in the present case amount to detriments of at most
several hundred dollars a year, without consideration of
benefits. We believe that if there were an individual showing
that substantial detriments were not offset by comparable
advantages and that this resulted in a serious hardship, the
affected individual should be protected from the change by
article XII, section 7. Further, our opinion in this case should
not be interpreted as approving major deletions in the types of
coverage offered during an employee's term. Coverage of a
particular disease or condition should not be deleted, even
though other coverage might be improved, if the deletion would
result in serious hardship to those who suffer from the disease
or condition in question. Moreover, if there should be changes
that will predictably cause hardship to a significant number of
beneficiaries who cannot at the time of the change be
specifically identified, we believe that the option of providing
an election to beneficiaries to retain existing coverage should
be available, at least in the absence of a showing by the state
of a compelling need for the change and the impracticability of
providing for an election. Finally, changes that substantially
reconfigure the mix of benefits to beneficiaries should be
approved only upon a strong showing of justification. Unusual
gaps in coverage should be avoided. Like the Michigan court in
Studier, we believe that the coverage that is offered should
generally be "in keeping with the mainstream" of health insurance
packages offered to active public employees in terms of scope and
balance.
V. CONCLUSION
The superior court's decision granting summary judgment
to the retirees is AFFIRMED insofar as it holds that health
insurance benefits are benefits protected by article XII, section
7, and that it is the benefits themselves during the period of
employment rather than the cost of the benefits during the same
period that receive constitutional protection. The decision is
REVERSED insofar as it holds that the comparative analysis of the
disadvantages and compensating advantages of changes to health
insurance is to be made by focusing on individuals rather than
the entire group of employees. The superior court's conclusion
that the changes under review violate article XII, section 7 of
the Alaska Constitution is therefore VACATED and this case is
REMANDED for further proceedings consistent with this opinion.
Discussion
Plaintiff-retirees['] class action complaints against
Defendants Poe, Bell, and the State (hereinafter collectively
referred to as the "State") allege that the State modified
medical benefits available to retired public employees, and that
this modification diminished or impaired the benefits they
received upon retirement. Plaintiffs seek declaratory and
injunctive relief against the State for alleged breach of
contract, breach of fiduciary duty, and violation of
constitutional protection.
This matter presents to the court an unavoidable
constitutional issue. Plaintiffs' main argument is that retiree
medical benefits are a vested contractual right protected by
Article XII, Section 7 of the Alaska Constitution, which
provides:
Membership in employee retirement systems of
the State or its political subdivisions shall
constitute a contractual relationship.
Accrued benefits of these systems shall not
be diminished or impaired.
The State argues that the medical benefits in question are
not retirement benefits protected by the Constitution. The State
also argues that even if such benefits are constitutionally
protected, it may modify the health plans, and that the court
must evaluate the plans as a whole to ensure that the
modifications are balanced (i.e. favorable changes offset
disadvantageous modifications). (Def.'s Mem. in Supp. Mot. for
Summ. J. at 23.)
Plaintiffs argue that Hammond v. Hoffbeck, 627 P.2d 1052
(Alaska 1981), controls this matter. In Hoffbeck, several
statutory amendments were made to PERS in 1976. These changes
had the effect of reducing the occupational disability benefits
of public safety employees from 67% to 40% of monthly salary for
occupational disability, and reduced occupational death benefits
from 100% to 40% of monthly salary at death.
The Alaska Supreme Court held in Hoffbeck that "accrued
benefits" (as stated in the Alaska Constitution) is the same as
"vested benefits." Hoffbeck at 1057. The Hoffbeck court held
that Article XII, Section 7 of the Alaska Constitution mandates
that retirement benefits are regarded as an element of the
bargained-for consideration given in exchange for an employee's
assumption and performance of duties as a state employee. Id.
The court further held that rights in PERS vest on employment.
Id.
In addition, the Hoffbeck Court ruled that any
disadvantageous changes in a pension plan must be accompanied by
comparable new advantages. Id. The court also ruled that the
determination of whether vested benefits have been diminished
must be made on a case-by-case basis. Id. at 1059.
Plaintiffs argue that the Hoffbeck Court adopted a broad
view of what constitutes a vested retirement benefit. This court
agrees. The Hoffbeck Court applied the "plain meaning" of
Article XII, Section 7 of the Constitution and determined that
the changes made to the retirement benefits were
unconstitutional. This court is bound to do the same.
The State argues that the medical plans in question are not
benefits, but merely health insurance. (Def.'s Mem. in Supp.
Mot. for Summ. J. at 16-17, 23.) Therefore, according to the
State, the issue is what services are available to members, not
what services a person might need from one year to the next. The
State argues that depending on one's health, costs for an
individual will vary from year to year. The State contends that
major medical insurance does not equate to free medical care.
Defendants assert that the court must look at the plan as a
whole, balancing the availability of benefits to a member, not
the actual use at the moment which they are implemented. (Def.'s
Mem. in Supp. Mot. for Summ. J. at 23.)
We disagree with the State's argument. The plain meaning of
"retirement systems" includes medical benefits. Retirement
systems are typically considered to be a package of available
services/benefits, not simply the monthly "pension" check. In
contrast, the State argues that the court should look only at the
dollar amount it contributes to the retirees' medical benefits.
The State argues that since it still pays the same amount towards
health benefits, the allocation of that amount among the
components of the health plan is irrelevant. The State argues
that it has the power to change the health plans as long as
disadvantageous changes are offset by advantageous changes and
the total contribution or cost to the State does not decrease.
(Def.'s Mem. in Supp. Mot. for Summ. J. at 23.)
Hoffbeck does not support the State's argument. The
Hoffbeck Court applied the plain meaning of the constitutional
provision. In the present matter, using the plain meaning
approach, the medical plans in question are part of the
constitutionally protected retirement benefits. Hoffbeck and its
progeny45 dictate to this court that a determination of whether
vested rights to retirement benefits have been diminished must be
made by the affected individual on a case-by-case basis.
Hoffbeck at 1059. Such an individual analysis implies that the
retirement benefits protected by the Constitution are more than
the overall cost of the plan. Hoffbeck's recognition that
retirement benefits are to be regarded as "an element of the
bargained-for consideration given in exchange for an employee's
assumption and performance of the duties of his employment" and
should "reflect[] the realities of public employment in Alaska,"
also support this conclusion. Id. at 1056-57.
Other jurisdictions have addressed the issue of the extent
that retirement benefits are protected under state constitutions.46
The State argues that New York has addressed the issue presented
before this court and relies on Lippman v. Board of Education of
the Sewanhaka Central High School District, 66 N.Y.2d 313, 487
N.E.2d 897, 496 N.Y.S.2d 987 (1985). In Lippman, the New York
Court of Appeals ruled that the medical benefits in question were
not protected under its constitutional provision similar to
Article XII, Section 7 of the Alaska Constitution.
The Lippman Court found that "health benefits" were not
"retirement benefits" as that term is used in the New York
Constitution, noting that the constitutional provision "protects
only the benefits of membership in a retirement system; other
employment conditions, though they may be protected by statute,
resolution or individual collective bargaining agreement, are not
within its coverage." Id. at 317. The court noted that the
health insurance premium payment provision is contained not in
the New York Retirement and Social Security Law, but in the
State's Civil Service Law. This is not the case in Alaska where
the right to medical benefits is included in Title 39. This
court declines to follow Lippman, because Lippman involved a
medical plan that was separate from the state retirement system.
As discussed previously, Alaska's retirement system includes a
system of retirement benefits that include more than just a
pension.
The State also argues that this court be guided by how
health benefits are treated under the federal Employment
Retirement Income Security Act ("ERISA"). The State refers to In
Re Unisys Corp. Retiree Medical Benefit "ERISA" Litigation, 58
F.3d 896 (3d Cir. 1995), in which the court held that Congress
did not impose automatic vesting of welfare benefit plans. Under
ERISA a distinction is made between "pension plans" and "welfare
plans," and medical benefits fall into the latter category.
There is no basis for such a distinction under Alaska law.47
Municipality of Anchorage v. Gentile, 922 P.2d 248 (Alaska
1996)[,] is the only other case in Alaska that addressed the
issue of whether Article XII, Section 7 of the Alaska
Constitution protected retiree medical benefits. In Gentile, the
issue was whether the Municipality of Anchorage ("MOA") and its
public safety employees intended collective bargaining agreements
to vest post-retirement medical benefits at retirement. The
Gentile Court ruled that "since PERS benefits are vested," it as
fair for the trial court to infer that the parties also intended
the medical benefits to vest. Id. at 258. Accordingly,
Plaintiffs argue that any benefit derived from membership in PERS
and TRS is a vested right, including medical benefits.
The Alaska Supreme Court decided the Gentile matter using
contract law, based on explicit contracts: the collective
bargaining agreements, and did not reach the constitutional issue
presented here.48 The trial court in Gentile,49 however, ruled,
"Post-retirement medical coverage is provided to the vast
majority of MOA employees under [PERS]. Those benefits may not
be diminished subsequent to retirement under Article XII Section
7 of the Alaska Constitution." Plaintiffs argue that the Supreme
Court's opinion in Gentile implies that medical retirement
benefits are constitutionally protected. While this court is not
bound by the trial court's opinion in Gentile, nor by dicta in
the Supreme Court's affirming of that case, this court does find
both decisions to be significant and persuasive.
This court is bound under Hoffbeck to apply the natural
meaning of "retirement systems" to include medical benefits.
Accordingly, any changes in the medical plans that operate to an
employee's disadvantage must be offset by a comparable new
advantage to that employee. Hoffbeck, 627 P.2d at 1057. A
determination of whether vested rights to benefits have been
diminished must be made on a case-by-case basis. Id. at 1059.
Defendants strongly argue that changes to the plans that
benefit employees offset any changes that are disadvantageous to
employees. Defendants' argument appears similar to the
hypothetical data used by the State in Hoffbeck in its attempt to
justify the changes to the benefits at issue there. See 627 P.2d
at 1058. The Hoffbeck Court rejected this approach noting that
" ` the comparative analysis of disadvantages and compensating
advantages must focus on the particular employee whose own vested
pension rights are involved,' . . . and not on hypothetical
cases." Id., quoting Betts v. Board of Administration of the
Public Employees Retirement System, 582 P.2d 614, 617 (Cal.
1978). While adjustments to the retirement system that satisfy
this test may be constitutionally implemented under Hoffbeck, no
such adjustments have ever been upheld by the Alaska Supreme
Court under this test.50
Plaintiffs have submitted affidavits51 from several class
members demonstrating that "at least as to some individuals, the
new system cannot be said to offer advantages which outweigh its
obvious disadvantages." Hoffbeck, supra, 627 P.2d at 1058. This
court find that the changes to the medical benefits system
violate Article XII, Section 7 of the Alaska Constitution, at
least as to those class members who are adversely affected by
them.
_______________________________
1Commissioner Jim Duncan was substituted for Commissioner Bob Poe
on Petition for Review to the Supreme Court.
2AS 39.35.010 - .690.
3AS 14.25.010 - .220.
4"Each person who is entitled to receive a monthly benefit from
the retirement system shall be provided with major medical
insurance coverage." Ch. 200, 1-2, SLA 1975.
5A 1975 booklet is typical. It stated: "The entire cost of this
Medical Program for Retired Employees and their eligible family
members will be paid by the Public Employees Retirement or
Teachers' Retirement Systems." In 1980 a handbook given to PERS
members stated:
Comprehensive major medical insurance
coverage is provided for you, your spouse,
and your eligible dependent children whenever
you are receiving a retirement benefit, a
disability benefit, or a survivor or death
benefit from the system. This coverage is
automatic and continues as long as you or
your survivors are eligible to receive
benefits from the system. There is no cost
to you for this insurance.
6According to Allison Elgee, Deputy Commissioner of the
Department of Administration, cost neutrality was important not
only to avoid increasing the cost of the medical plan to the
retirement systems but also to the second tier employees who upon
retirement before the age of 60 had to pay a full premium for the
plan and upon reaching the age of 60 had to pay a half premium
until reaching the age of 65.
7In general, the changes that improved coverage included an
increase in the lifetime maximum payment from $1 million to $2
million, changing travel benefits from one-way to round trip,
increasing from $15 per visit to 80% payment for precertified
mental health and chemical dependency treatment, providing free
mail-order service for generic or brand name drugs (previous
coverage was $5 for each brand name drug while generic drugs were
free), and reimbursing retirees eligible for Medicare for 100% of
covered expenses not paid by Medicare rather than the previous
80%. The Medicare change was by far the most important and
expensive change. The reductions in benefits included increasing
the deductible from $100 to $150 per year, eliminating a
provision that waived the annual deductible once $50,000 in
claims were paid, eliminating the lifetime co-insurance of 100%
once $50,000 in claims were paid, changing co-insurance from 80%
of $1,950, 90% of the next $3,000, and 100% of the remainder to
co-insurance of 80% of the first $4,000 and 100% of the
remainder. This resulted in a change of maximum out-of-pocket
payments from $690 per year to $800 per year. In addition, if
the retiree does not use the mail-order service for drugs, the
cost for generic drugs increased from $0 to $4 and the cost for
brand name drugs increased from $5 to $8.
8We set out in an appendix the full text of the discussion
portion of Judge Rindner's thorough opinion.
9Alakayak v. British Columbia Packers, Ltd., 48 P.3d 432, 447
(Alaska 2002).
10Id.
11Hickel v. Cowper, 874 P.2d 922, 926 (Alaska 1994).
12Hammond v. Hoffbeck, 627 P.2d 1052, 1056 (Alaska 1981).
13Id. at 1055.
14Id. at 1057.
15Id. at 1057 n.7 (quoting County of Apache v. Southwest Lumber
Mills, Inc., 376 P.2d 854, 856 (Ariz. 1962) (en banc)); see also
Hickel, 874 P.2d at 926 (quoting Arco Alaska, Inc. v. State, 824
P.2d 708, 710 (Alaska 1992)).
16In re Unisys Corp. Retiree Medical Benefit "ERISA" Lit., 58 F.3d
896, 901 (3d Cir. 1995) (quoting Hozier v. Midwest Fasteners,
Inc., 908 F.2d 1155, 1160 (3d Cir. 1990)).
17Id. at 901 (quoting Moore v. Metropolitan Life Ins. Co., 856
F.2d 488, 492 (2d Cir. 1988)).
18627 P.2d 1052, 1059 (Alaska 1981).
19Id.
20732 P.2d 1083, 1087 (Alaska 1987) (quoting Opinion of the
Justices, 303 N.E.2d 320, 327 (Mass. 1973)).
21922 P.2d 248, 258 (Alaska 1996).
22Id.
23Our conclusion in this respect is in accordance with similar
conclusions reached by numerous state courts holding that medical
benefits are part of vested retirement benefits. See, e.g.,
Thorning v. Hollister Sch. Dist., 15 Cal. Rptr. 2d 91, 95 (Cal.
App. 1992) (holding that health and life insurance benefits were
not dissimilar from pension benefits and could not be
unilaterally terminated because they were important as inducement
for continued service and as factor in decision to retire);
Weiner v. County of Essex, 620 A.2d 1071, 1079-80 (N.J. Super.
Law Div. 1992) (finding that post-retirement medical benefits
were property rights of employees employed at the time, and thus
the county could not unilaterally terminate them); Emerling v.
Village of Hamburg, 680 N.Y.S.2d 37, 37-38 (N.Y. App. Div. 1998)
(holding that absent express reservation of rights, city could
not eliminate retiree medical benefits impliedly promised in
return for ten years of employment); McMinn v. City of Oklahoma
City, 952 P.2d 517, 521-22 (Okla. 1997) (holding that retirement
benefits included package of pension, medical, and other benefits
rather than pension benefits alone); State ex rel. City of
Wheeling Retirees Ass'n, Inc. v. City of Wheeling, 407 S.E.2d
384, 387 (W. Va. 1991) (construing statute to require same
medical insurance benefit level for retiree as for employee);
Dadisman v. Moore, 384 S.E.2d 816, 829-31 (W. Va. 1988) (finding
that state must appropriate funds for retiree health insurance
benefits rather than redirect funds already present in retiree
trustee accounts).
24The 1975 booklet promises: "The entire cost of this Medical
Program . . . will be paid by [the systems]." And the 1980
handbook provides that "[c]omprehensive major medical insurance
coverage is provided . . . . There is no cost to you for this
insurance." (Emphasis added.) See supra note 5.
25In Hammond v. Hoffbeck we stated:
We are not called upon to consider the
problem, which has frequently arisen in other
jurisdictions, presented by a pension fund
that is insufficient to satisfy all employee
claims brought under its provisions. We
intimate no view as to the appropriate legal
analysis of any legislative alteration in
employee benefits systems made in response to
such circumstances.
627 P.2d at 1057 n.11. That observation applies to this case as
well.
26Id. at 1057. We noted our general agreement with the approach
taken by the California Supreme Court that recognizes that
modifications may be made "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." Id. (quoting Allen v. City of Long Beach, 287 P.2d 765,
767 (Calif. 1955)). We also quoted Allen as follows: "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." Hoffbeck, 627 P.2d at
1057. In addition, we quoted another California case to the
effect that "the offsetting improvement must also `relate
generally to the benefit that has been diminished.' " Id.
(quoting Betts v. Bd. of Admin. of the Pub. Employees Ret. Sys.,
582 P.2d 614, 617-18 (Cal. 1978)).
27Id.
28Guy Bell, the Director of the Division of Retirement and
Benefits, and as such the administrator of PERS and TRS, filed an
affidavit in support of this aspect of the state's position. Mr.
Bell affied:
To my knowledge, no reasonable analysis of
medical costs can be done on an individual by
individual basis in the manner in which
changes in individual retiree pension
benefits can be calculated. The only
realistic approach is to determine the total
cost and benefit of the changes, as was done
by the division and its professional
consultants.
29Review of the other affidavits submitted by the retirees
similarly show the speculative and subjective nature of the
affiants' dismissive regard for the positive changes. For
example, C.E. affies that the coordination of benefits with
Medicare does not benefit her because the complexity of the
system causes some medical providers to simply bill retirees
rather than determining which insurance provider should pay. She
also prefers her local pharmacy over the mail-order program for
prescription drugs and thus does not derive any benefit from this
change. C.E. further doubts she will ever exceed $1 million in
benefits in her lifetime, rendering that benefit worthless to
her. Finally, C.E. complains that the change from one-way to
round-trip travel reimbursement provides no enhancement to her
benefits because she lives in a city where professional medical
treatment is available.
30627 P.2d at 1059.
31Id. at 1058.
32Id.
33Id.
34Id.
35582 P.2d 614 (Cal. 1978).
36Id. at 616.
37Id.
38Studier v. Michigan Pub. Sch. Employees Ret. Bd., File 00-92435-
AZ, Circuit Court for Ingham County, Michigan, pp. 17-18 (Order
of 2/21/01).
39Id. at 19.
40Id. at 20.
41Hoffbeck, 627 P.2d at 1058.
42See supra note 26.
43See the discussion in part IV.C, supra, at 11-12.
44627 P.2d at 1058.
45See State ex. rel. Hammond v. Allen, et al., 625 P.2d 844
(Alaska 1981) (finding that the Alaska Constitution protected
repealed retirement system program); Sheffield v. Alaska Public
Employees' Association, Inc., 732 P.2d 1083 (Alaska 1987)
(finding that adoption of new actuarial table for early
retirement benefits was unconstitutional and applied Hoffbeck's
diminution of benefits on a case-by-case basis); Municipality of
Anchorage v. Gallion, 944 P.2d 436 (Alaska 1997) (prohibiting
joinder of weaker retirement plan with existing plans); and
Flisock v. State of Alaska, 818 P.2d 640 (Alaska 1991) (holding
that retirement benefits vest upon enrollment into the retirement
system).
46See Betts v. Board of Administration of the Public Employees'
Retirement System, 21 Cal. 3d 859, 582 P.2d 614, 148 Cal. Rptr.
158 (1978) (California Supreme Court ruling that "limited
vesting" approach allows reasonable modification of the
employee's vested pension rights); Musselman v. Governor, 450
Mich. 574, 545 N.W.2d 346 (1995) (Michigan Supreme Court divided
whether health benefits fall within the protection of the state
constitution); and Lippman v. Board of Education of the Sewanhaka
Central High School District, 66 N.Y.2d 313, 487 N.E.2d 897, 496
N.Y.S.2d 987 (1985) (New York Court of Appeals finding that
health benefits independently funded are not protected within
state constitution).
47Thus for example, disability benefits are considered to be part
of a welfare plan under ERISA and thus not subject to vesting.
58 F.3d at 901. Hoffbeck, however, specifically concerned a
reduction in disability benefits.
48See Municipality of Anchorage v. Gentile, 922 P.2d 248 (Alaska
1996) (Note 13 states, "The trial court held that by diminishing
the medical benefits, MOA violated article XII, section 7 of the
Alaska Constitution. Because the class members' contract claim
fully resolves the question of whether the medical benefits
vested when the covered employees retired, it is unnecessary to
consider claimants' constitutional claim.").
49John M. Gentile, et al. v. Municipality of Anchorage, Case No.
3AN-92-9377 CI (Superior Court June 25, 1993).
50See Hoffbeck, supra, and cases cited in footnote 3, supra.
51See Aff. [E.P.S.], Ex. 10; Aff. [R.J.D.], Ex. 11; Aff. [T.S.],
Ex. 12; Aff. [C.E.], Ex. 13; Aff. [B.D.], Ex. 15; and Aff.
[S.T.], Ex. 16., attached as exhibits to Pls.' Mem. in Supp. Mot.
for Summ. J.
