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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. 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.