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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Board of Trustees, Anchorage Police and Fire Retirement System v. Municipality of Anchorage (09/29/2006) sp-6056

Board of Trustees, Anchorage Police and Fire Retirement System v. Municipality of Anchorage (09/29/2006) sp-6056, 144 P3d 439

     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


BOARD OF TRUSTEES, )
ANCHORAGE POLICE AND ) Supreme Court No. S- 11893
FIRE RETIREMENT SYSTEM, )
) Superior Court No. 3AN-03-10273 CI Appellant, )
)
v. ) O P I N I O N
)
MUNICIPALITY OF ANCHORAGE, ) No. 6056 - September 29, 2006
)
Appellee. )
)
)
MUNICIPALITY OF ANCHORAGE,    )
                              )    Supreme Court No. S-11922
             Appellant,            )
                              )     Superior  Court  No.  3AN-03-
04760 CI
     v.                       )
                              )
BOARD OF TRUSTEES,       )
ANCHORAGE POLICE AND          )
FIRE RETIREMENT SYSTEM,  )
                              )
             Appellee.             )
                              )




          Appeal  in File No. S-11893 from the Superior
          Court  of the State of Alaska, Third Judicial
          District, Anchorage, Morgan Christen,  Judge.
          Appeal  in File No. S-11922 from the Superior
          Court  of the State of Alaska, Third Judicial
          District, Anchorage, Dan A. Hensley, Judge.

          Appearances:   Douglas J.  Serdahely,  Patton
          Boggs LLP, Anchorage, and Robert D. Klausner,
          Klausner   &   Kaufman,   P.A.,   Plantation,
          Florida, for Appellant and Appellee Board  of
          Trustees.   James  D.  Gilmore,  Gilmore  and
          Doherty,  P.C., Anchorage, for  Appellee  and
          Appellant Municipality of Anchorage.

          Before:   Bryner,  Chief  Justice,  Matthews,
          Eastaugh, Fabe, and Carpeneti, Justices.

          FABE, Justice.

I.   INTRODUCTION
          In  these consolidated appeals, we address the question
whether  the Municipality of Anchorage is required to  compensate
the Anchorage Police and Fire Retirement System (APFRS System  or
System) for any resulting adverse actuarial impact on the  System
when  the  Municipality of Anchorage settles a grievance.   Under
different  factual scenarios, this question was litigated  before
two  different  superior  court  judges,  with  each  reaching  a
different  result.   One  superior court  judge  determined  that
chapter   3.85  of  the  Anchorage  Municipal  Code  contemplates
absorption by the System of the impact of grievances.  Therefore,
any  resulting  actuarial liability from  grievances  is  not  an
unconstitutional  change  to  the  Retirement   Plan,   and   the
Municipality  does  not have to compensate  the  System  for  the
impact.  The other superior court judge determined that requiring
the  System  to  absorb  the impact of  the  actuarial  liability
violates  article  XII,  section 7 of  the  Alaska  Constitution.
Because  we believe that under the language of chapter  3.85  and
the  policies adopted by the Board of Trustees of the System, the
impact  of the grievances does not implicate article XII, section
7  of  the Alaska Constitution, we conclude that, under the facts
of  the  cases  before us, the Municipality of Anchorage  is  not
required to compensate the System for the actuarial impact of the
settlement of the grievances.
II.  FACTS AND PROCEEDINGS
     A.   The APFRS System
          The  Municipality of Anchorage has maintained a defined
benefit retirement system since 1968 called the Anchorage  Police
and   Fire  Retirement  System,  which  was  created  to  provide
disability,  retirement, and death benefits to the  Municipalitys
police  and fire department employees.1  There are three distinct
plans  within APFRS, and members belong to either Plan I, II,  or
III, depending on their date of hire.
          By  the  1990s, Plans I and II had accumulated  surplus
assets,  and  a lawsuit, hereinafter referred to as Gallion  II,2
was  filed by members of Plans I and II claiming the right to the
surplus   assets.   The  parties  entered  into   a   conditional
settlement   agreement,  whereby  it  was   agreed   that   [a]ll
beneficial,  residual  and reversionary interests  in  the  trust
assets, including any surpluses, belong to the members and not to
the  Municipality.  It was further agreed that the Systems  Board
          of Trustees (Board) would recommend to the Anchorage Assembly
that  it repeal the existing Plan under chapter 3.85 and adopt  a
new   ordinance  and  Plan.   Under  the  conditional  settlement
agreement,3  a distribution plan for the existing surplus  assets
was  made.   It  was further recommended that a  sixteen  percent
contingency  be  set aside to protect from market  and  actuarial
fluctuations.  With regard to future surplus assets in excess  of
the sixteen percent contingency, the agreement provided that
          75%   may   be   used  for   future   benefit
          enhancements and the remaining  25%  of  such
          surplus  shall  be  retained  as  a  separate
          contingency   reserve.   Any   such   benefit
          enhancements  must be approved  by  a  simple
          majority of the new Board[.]
          
          A Notice of Proposed Settlement was sent to all members
of Plans I, II, and III, which outlined the terms of the proposed
settlement  and  noted  that  the  settlement  provides  for  the
possibility of additional future benefit increases.   Subject  to
conditions set forth by the Ordinance, future surpluses above the
16%  contingency reserve (plus an additional contingency  reserve
to  be  established from future surpluses) may be used for future
benefit   increases  without  further  Assembly  approval.    The
Municipality  adopted  the  recommendations  set  forth  in   the
conditional  settlement  agreement  and  revised  chapter   3.85.
Relevant  portions of revised chapter 3.85 are set  forth  below.
The  revisions  of  significance to this  appeal  are  summarized
below:
System Purpose
          Anchorage  Municipal  Code  3.85.010  sets  forth   the
purpose of the revised Plan, stating in relevant part that  [a]ll
rights   under  the  prior  plan  are  carried  forward   without
interruption.   This  system  is intended  to  be  a  contractual
relationship  in accordance with the provisions of  Article  XII,
Section 7, of the Constitution of Alaska.
Relevant Definitions
          Anchorage Municipal Code 3.85.015 contains a number  of
definitions,  including AMC 3.85.015(F),  which  defines  average
monthly compensation for Plan I and II members as
          compensation paid by the Municipality  during
          the  period of the three consecutive calendar
          years   which  yielded  the  highest   income
          divided  by  the number of months  for  which
          such  compensation  was received.   This  can
          also  be calculated by utilizing the two full
          calendar years preceding retirement, plus  at
          least  the month of January of the third  and
          final  year if that produces a higher monthly
          average.
               Under AMC 3.85.015(L), compensation for Plan I and
Plan  II members is defined to include overtime, but overtime  is
not  included  as  compensation for Plan III members.   Anchorage
Municipal  Code  3.85.015(U) defines an  enhanced  benefit  as  a
benefit  created from time to time from available surplus assets.
     Under AMC 3.85.015(OOO), vested benefit means an immediate or
deferred  benefit to which a member has gained a  non-forfeitable
right under the provisions of [chapter 3.85].
Authority of the Board of Trustees
          Under   AMC   3.85.020(A),  the  sole   and   exclusive
administration of the retirement system is vested in the Board of
Trustees and [t]he board shall administer the system as set forth
in  this  chapter and shall be the final authority in all matters
pertaining  to the application, interpretation and administration
of the provisions of [chapter 3.85].
          Under  AMC 3.85.020(G), the Board has the authority  to
take  such  action  as  it  deems  necessary  to  carry  out  the
provisions  of  the  chapter.  All  decisions  of  the  board  of
trustees  made  in  good  faith  shall  be  final,  binding   and
conclusive  on  all  parties, consistent with the  provisions  of
[chapter 3.85].
Retroactive Compensation
          Retirement benefits for members of Plans I and  II  are
calculated  at  the rate of 2.5% of average monthly  compensation
multiplied  by the years of credited service under AMC  3.85.065.
Retroactive compensation . . . shall be considered by  the  board
in  the  calculation  of  benefits if  paid  as  a  result  of  a
grievance, arbitration award, collective bargaining agreement  or
court  ordered  judgment  or settlement.   However,  any  amounts
awarded  or  paid  as  court  costs,  interest,  attorneys  fees,
statutory  penalties, punitive damages and any other  type[s]  of
retroactive  compensation that does not meet  the  definition  of
compensation . . . shall be specifically excluded.
          Under  AMC 3.85.050(C), [a]ctive members may  elect  to
have retroactive pay treated as compensation in the year in which
paid  or  to  have retroactive pay allocated to the  pay  periods
where it would have been actually paid.
Required Contributions of the Municipality
          Anchorage  Municipal  Code  3.85.055(A)  provides  that
[n]otwithstanding  the provisions of subparagraph  E  below,  the
municipality   shall  make  contributions   on   an   actuarially
determined basis generally on a municipality/member ratio of  2.5
to  1.  Subparagraph  E  provides  that  [t]he  municipality,  in
addition  to the payroll deductions of members, shall  contribute
additional monies to the system in an amount to ensure  that  the
system is at all times financially sound.
          Anchorage Municipal Code 3.85.055(J) provides, [a]s  of
the  effective  date of this chapter, Plans I and  II  are  in  a
surplus  funded status.  Resumption of contributions to  Plans  I
and  II  shall not be required unless, as determined and required
by  the  actuary for the system, the funded status  of  the  plan
falls  below  100  percent funding; nor  shall  contributions  be
continued after 100 percent funding is again achieved.
Reserve Funding and Enhanced Benefits
          The Board is required under AMC 3.85.155 to maintain  a
contingency  reserve  at  all times for funding  of  the  minimum
defined benefits at not less than sixteen percent of accrued  and
projected  future liabilities.  Surplus assets are  reserved  for
the  exclusive  benefit of the members and beneficiaries  of  the
System and surpluses belong to the members under 3.85.155(B).
          Under  AMC  3.85.155(D), if the Plan has 116%  funding,
the  Board  has the authority to approve the payment of  enhanced
benefits  from  the  surplus assets with a value  not  to  exceed
seventy-five  percent of the available surplus assets,  with  the
remaining twenty-five percent held as additional reserve funding.
Anchorage Municipal Code 3.85.155(D) further provides that  [t]he
form   of  any  enhancement  shall  be  determined  in  the  sole
discretion of the board.
          Anchorage  Municipal Code 3.85.155(G) states that  [n]o
member  or beneficiary shall have a contractual right as  to  the
timing  of a distribution of enhanced benefits authorized by  the
board  nor  to receive a particular form of enhancement  benefit,
except  as provided in this section. And AMC 3.85.155(H) provides
that  [a]ll enhanced benefits shall be funded solely from surplus
assets and shall not be the actuarial or financial responsibility
of the municipality.
          On  December  7, 2000, the Board adopted a  new  Policy
2000-4  to  establish  the  Boards  policy  with  regard  to  the
application  of retroactive compensation payments to  members  of
the  System  following the reestablishment of  the  Plan.   Under
Policy  2000-4,  retroactive compensation  is  again  defined  in
relevant  part  as  pay  resulting from  grievances,  arbitration
awards,   collective  bargaining  agreements,  or  court  ordered
judgments,  but excluding any amounts awarded or paid  for  court
costs,  interest, attorneys fees, statutory penalties or punitive
damages[.]    While  for  retired  or  deferred  vested   members
retroactive compensation is allocated to the pay periods where it
would  have  actually  been  earned, active  members  may  either
allocate  retroactive  compensation to a  single  pay  period  or
allocate it to the periods where it would have been earned.  Late
payment  of overtime is allocated to the pay period where  it  is
paid rather than where it is earned.  Policy 2000-4 provides that
[i]f  eligible  retroactive compensation alters the  compensation
component  of any benefit calculation (such as the  need  to  use
different high years or different pay periods), then the  benefit
will be recalculated to use the higher value.
     B.   The Stillman Litigation
          Police  Officer Gereth Stillman was terminated  by  the
Municipality  in  September 1998.  Through the police  union,  he
filed  a grievance, which was denied by the Municipality and  was
then  referred to arbitration.  On August 1, 2000, the arbitrator
ruled that Stillman be reinstated with back pay and benefits  for
the   two-year  period  after  his  termination.   The  estimated
actuarial   present   value  of  the  difference   in   Stillmans
compensation due to the retroactive compensation was $604,654  as
of February 1, 2003.
          On  August  12,  2003, the Board of  Trustees  filed  a
complaint for damages against the Municipality, alleging that  it
did  not  allow the Board to participate in discussions regarding
Stillmans  restitution in a manner that would reduce  the  awards
impact  on the Systems liabilities.4  The complaint alleged  that
recognizing  Stillmans  award  in 2001  created  a  substantially
greater  liability to the System than would have been created  if
the award had been made in 2000.  It sought compensation from the
Municipality of the $604,654 impact on the System.  Both  parties
filed motions for summary judgment.
          On  March 11, 2005, Superior Court Judge Dan A. Hensley
issued  a decision denying the Boards motion for summary judgment
and  granting  the  Municipalitys motion  for  summary  judgment.
Judge  Hensley  noted  that the adverse  employment  action  that
triggered  the increased actuarial liability was not directed  at
the  pension  plan.   Judge  Hensley further  reasoned  that  the
increased  actuarial risk was only incidental to that action  and
that the pension plan recognized that employment litigation might
occasionally result in increased actuarial liability.  Therefore,
he  concluded that the risk of increased liability is an inherent
part  of  the  System,  that the Municipalitys  settling  of  the
grievance  was  not an unconstitutional change to the  Plan,  and
that  the Municipality did not have to compensate the System  for
that  liability.   The Board filed a motion for  reconsideration,
which was denied on March 21, 2005.  The Board appeals.
          C.   The 4-10 Litigation
          In  1994 the Municipality changed the work schedule  of
patrol  officers from four 10-hour shifts per week to five 8-hour
shifts per week.  This resulted in a grievance known as the  4-10
grievance  or litigation.  An arbitrator determined in 1998  that
the Municipality violated its collective bargaining agreement  by
unilaterally  changing the work week of patrol  officers  without
first  bargaining with the Anchorage Police Department  Employees
Association.   This  decision was appealed.   Although  the  4-10
grievance  was  still  pending when  the  conditional  settlement
agreement  was  reached,  and the settlement  agreement  resolved
other disputes, there was no resolution of the 4-10 litigation in
the conditional settlement agreement.
          In  early 2001, during the pendency of the appeal,  the
Municipality  reached  a  settlement with  the  Anchorage  Police
Department Employees Association by which the Municipality agreed
to  pay  back  wages  in the form of overtime to  certain  police
officers  in the amount of approximately $4 million.   The  Board
was  not  a  party to the 4-10 litigation.  Because  overtime  is
included  within the definition of compensation  for  members  of
Plans  I  and  II, the $4 million paid to the police officers  to
settle  the  4-10 litigation was factored into their compensation
and  therefore into their calculation of benefits.  This resulted
in  an increased cost and projected liability to the System.  The
actuarial  impact  on  the  System of  the  4-10  litigation  was
$577,406.
          On April 3, 2002, the Board demanded by letter that the
Municipality   pay  the  impact  of  the  4-10  liability.    The
Municipality did not respond in writing.  On February  18,  2003,
the  Board  filed  a complaint against the Municipality,  seeking
compensation  from  the Municipality for the  $577,406  liability
          resulting from the settlement.5  It relied upon AMC 3.85.055(E),
which  states  that the Municipality shall contribute  additional
monies to the system in an amount to ensure that the system is at
all times financially sound.
          A non-jury trial was held on January 5 and 6, 2005.  On
March  9,  2005,  Superior  Court Judge  Morgan  Christen  issued
findings  of  fact  and  conclusions  of  law,  determining  that
requiring  the System to absorb the cost of the actuarial  impact
of  the  4-10 liability violates Article XII, Section  7  of  the
Alaska  Constitution.  Judge Christen reasoned  that  [t]he  4-10
impact  on  the  System  was  not merely  a  delay  in  projected
compensation;   it  was  an  unanticipated  increase   in   total
compensation   paid  to  a  subset  of  officers   due   to   the
[Municipalitys] unforeseeable breach of the collective bargaining
agreement.  Judge Christen distinguished the 4-10 litigation from
other  factors  that could result in the Systems funding  falling
below  100%  (such  as  poor market performance  of  the  Systems
invested  assets) because the 4-10 litigation, unlike  the  other
factors, was created by the Municipalitys wrongful breach of  its
labor  contract.  Judge Christen then concluded that  the  Boards
policy  does  not  require that the System absorb  the  actuarial
impact of retroactive compensation awards that are caused by [the
Muncipality] breaching a collective bargaining agreement.
          Judge Christen determined that requiring the System  to
absorb   the   actuarial  impact  of  the  4-10  settlement   was
unconstitutional  because  it increases  the  Systems  costs  and
impairs   the   ability  of  the  System  to   withstand   future
contingencies, hastens the day when plan members  might  have  to
pay  future contributions, and reduces the ability of members  to
receive  surplus  benefits.  She also concluded that,  for  those
members  of  the Plan who were not a part of the 4-10 litigation,
payment  of  the grievance constituted an impact  on  the  system
without  a corresponding benefit.  Finally, Judge Christen  noted
that  payment  of $577,406 is more significant in an  actuarially
funded  system than in a pay-as-you-go system because it  impacts
the  ability of the accrued fund assets to generate income.   The
Municipality appeals.
          Because  the appeals raise substantially similar  legal
issues, they have been consolidated.
III. DISCUSSION
     A.   Standard of Review
            Constitutional  issues  and statutory  interpretation
present  questions  of law and they are reviewed  de  novo.6   We
review  grants  of summary judgment de novo and  will  affirm  if
there  are  no genuine issues of material fact and if the  moving
party  is  entitled to judgment as a matter of law.7  We exercise
our independent judgment when deciding questions of law and adopt
the  rule  of law that is most persuasive in light of  precedent,
reason, and policy.8
     B.   Judge Hensleys Decision Comports with Chapter 3.85.
          1.   Increased  actuarial liability from the settlement
               of grievances is inherent in the system.
               
          Anchorage  Municipal Code 3.85.050(B) contemplates  the
          payment of retroactive compensation in the event of a grievance
when  it  states,  [r]etroactive compensation  .  .  .  shall  be
considered by the board in the calculation of benefits if paid as
a result of a grievance, arbitration award, collective bargaining
agreement,  or  court ordered judgment or settlement.   (Emphasis
added.)     Similarly,   Policy   2000-4   defines    retroactive
compensation  as  pay  resulting  from  grievances,   arbitration
awards,   collective  bargaining  agreements,  or  court  ordered
judgments   or  settlements.   (Emphasis  added.)    Furthermore,
Policy  2000-4 allows the recipient of a grievance award  to  add
the  retroactive compensation to any year in which it is  earned,
and  to  thereby receive higher benefits at an increased cost  to
the System.
          Judge  Hensley  noted  that  the  Plan  accounted   for
employment   litigation  occasionally  resulting   in   increased
actuarial  liability.  Therefore, he concluded that the  risk  of
increased liability is an inherent part of the System,  that  the
Municipalitys   settlement   of  the   grievance   was   not   an
unconstitutional  change to the Plan, and that  the  Municipality
did not have to compensate the System for the liability resulting
from  the  settlement of  the grievance.  Judge Hensley  reasoned
that the decision to settle a grievance is akin to any employment
decision  which  results in the increase of  liabilities  to  the
System,  like the decision to authorize overtime and provide  pay
raises.
          Seeking reversal, the Board argues:
          The  result of the Stillman grievance is that
          Stillman received a substantial sum,  backpay
          award  based  on  a  resolution  between  the
          [Municipality]  and  the  [Anchorage   Police
          Department  Employees Association] concerning
          Stillmans  grievance arbitration proceedings.
          Because   this   substantial  backpay   award
          appeared in a single years paycheck,  it  had
          the   effect   of   unexpectedly   increasing
          Stillmans compensation.  As pension  benefits
          are  based  on  a percentage of compensation,
          this resulted in the $604,654 increase in the
          accrued liabilities of Plan II.
          
          The  net effect of the Stillman case is  that
          the [Municipality] reached an agreement in  a
          lawsuit  with  a third party  that  left  the
          Retirement System with the bill.  The  assets
          of the System, reserved for all participants,
          firefighters, other police officers,  widows,
          widowers,  and orphans in Plan II, have  been
          misdirected to pay the Municipalitys debt  on
          behalf  of  Stillman.  This is precisely  the
          misallocation  of  assets and  diminution  of
          benefits   disapproved  by  this   Court   in
          [Municipality  of Anchorage v.  Gallion,  944
          P.2d 436 (Alaska 1997) (Gallion I)].
          
The  result of the grievance to which the Board objects,  though,
is  a  product  of  its  own Policy 2000-4, which  allows  active
members  to  allocate retroactive compensation to  a  single  pay
period  and  expressly  provides that [i]f  eligible  retroactive
compensation  alters the compensation component  of  any  benefit
calculation  (such  as the need to use different  high  years  or
different pay periods), then the benefit will be recalculated  to
use  the  higher value.  Rather than being misdirected, Stillmans
retroactive  compensation was calculated just as contemplated  by
the Plan.
          The   Board  also  misapprehends  Gallion  I  when   it
characterizes  the  net  effect  of  the  Stillman  grievance  as
precisely the misallocation of assets and diminution of  benefits
disapproved  by  this  Court in Gallion  I.   In  Gallion  I,  we
considered the constitutionality of an ordinance that would  have
permitted  the Municipality to make payments out of excess  funds
in Plans I and II to ensure that Plan III was financially sound.9
We recognized that chapter 3.85 had treated the plans as separate
since  their  inception,  with distinct members  and  benefits.10
Also,  under AMC 3.85.100(G), an independent actuarial evaluation
was required every two years for Plans I and II.11  We determined
that  [n]othing  about the APFRS before 1994 would  have  alerted
newly  enrolled  plan members that their contributions  might  be
used  prospectively or retrospectively to fund one of  the  other
plans.12   We also noted that plan members reasonably could  have
expected  that the product of their contributions would  be  used
for  their  ultimate  benefit.  Certainly  they  could  not  have
expected that any surplus would be used for the benefit  of  non-
plan members.13
          The  Municipality distinguishes Gallion I, arguing that
in the present case, members and the Municipality have known from
the  inception of the Plans that the payment of grievance  awards
would  be  treated as compensation, and that contributions  would
not be required from the Municipality unless the funded status of
the  system  were to fall below 100%.  It reasonably  notes  that
Gallion  I  would  have  been  a  different  case  if,  from  the
inception,  members of the Plans had been notified  that  surplus
assets  in  each  of  their  plans would  be  averaged  with  the
surpluses in other plans to determine whether contributions  were
necessary.
          Judge  Hensleys conclusion that the increased liability
stemming  from the Stillman grievance was inherent in the  System
is  therefore amply supported by the plain language of  the  Plan
and Policy 2000-4, and our holding in Gallion I does not dissuade
us from affirming.14
          2.   That  the  Board was not a party to  the  Stillman
               grievance does not change the result.
               
          The  Board  was not a party to the Stillman litigation,
and  therefore  contends that it was error for Judge  Hensley  to
reject  its  argument that it should not be bound to  absorb  the
actuarial  impact from the grievance.  Relying upon  the  Seventh
Circuits decision in United States v. City of Chicago,15 the Board
argues  that the Municipality may not impose obligations  on  the
Board that the Municipality incurred in litigation with Stillman.
          But  as  the  Municipality notes, City  of  Chicago  is
distinguishable.  In City of Chicago, the litigants agreed upon a
consent  decree to which the board of a pension plan  was  not  a
party.   The consent decree required the pension plan  to  accord
seniority  status  to police officers who had been  discriminated
against.   However,  the  contributions made  on  behalf  of  the
officers under the consent decree did not equal those required by
the  plan  for  full  seniority status to  be  granted.16   Since
statutory language supported the boards position that it was  not
the  policy  of  the plan to award seniority status  under  those
conditions,  the  court  ordered  that  the  consent  decree   be
modified.17  Here, the increase in actuarial liability  resulting
from  the  Stillman  grievance is consistent  with,  rather  than
contrary to, the terms of the Plan, and City of Chicago therefore
offers no support for the Boards argument.
          As  the  Board  notes,  Alaska  courts  recognize  that
parties  to litigation may not bind or affect the rights of  non-
parties.18   But  the Board is essentially only  being  asked  to
absorb  the actuarial liability that was incurred through  normal
operation of Policy 2000-4, and not to alter its policy in  order
to  accommodate unrelated liabilities imposed by a  third  party.
As  the  Municipality argues, the Board in  fact  agreed  to  the
imposition  of  the  Stillman  obligation  because  the  contract
between the parties, memorialized at AMC 3.85.050(B), sets  forth
the  procedure for accounting for retroactive compensation in the
event  of  a  grievance.  Therefore, it was not error  for  Judge
Hensley to reject the Boards argument that it should not have  to
absorb  the  liability  because  it  was  not  a  party  to   the
litigation.
          3.   Judge  Hensley did not inappropriately  substitute
               his judgment for that of the Board.
               
          Ordinarily this court uses its independent judgment  on
questions  of law unless the issue[s] involve[] agency  expertise
or  the determination of fundamental policy questions on subjects
committed to the agency.19  If the issue involves agency expertise
or  fundamental policy questions, we review under the  reasonable
basis  standard and defer to the agency if its interpretation  is
reasonable.20
          The Board asserts that by virtue of the language of AMC
3.85.020(A), it is the final authority in all matters  pertaining
to  the  application,  interpretation and administration  of  the
provisions  of  [chapter  3.85].  It therefore  claims  that  its
decision  that additional contributions by the Municipality  were
necessary  in  order  to ensure that the system  was  financially
sound  should  have  been  binding on the  Municipality,  as  AMC
3.85.055(E) provides that [t]he municipality, in addition to  the
payroll deductions of members, shall contribute additional monies
to  the  system in an amount to ensure that the system is at  all
times  financially  sound.  The Board  further  argues  that  its
determination  that  the Municipality was  required  to  make  an
additional contribution was an exercise of its power to determine
actuarial standards and should have been accorded deference.
          The  Municipality counters that, even though the  Board
          is the sole and exclusive administrator of the System, it cannot
unilaterally  change  the  terms  of  the  contract  between  the
Municipality and the System.  It contends that, since this is  an
issue  of  statutory interpretation, this court  should  use  its
independent  judgment and not defer to the  Board.   Interpreting
the  ordinance  and using contract principles,  the  Municipality
maintains  that there are no provisions of chapter 3.85 requiring
that  the  Municipality pay for the grievance, and  there  is  no
evidence  that  the  expertise of the  Board  was  even  used  in
determining that the Muncipality should pay for the impact of the
Stillman grievance.           The term financially sound  is  not
defined  by  the statute, and therefore an argument can  be  made
that  the Board has been granted the authority to flesh  it  out.
But  AMC 3.85.055(J) provides, [a]s of the effective date of this
chapter,  Plans  I  and  II  are  in  a  surplus  funded  status.
Resumption  of  contributions to Plans I  and  II  shall  not  be
required  unless, as determined and required by the  actuary  for
the system, the funded status of the plan falls below 100 percent
funding;  nor shall contributions be continued after 100  percent
funding is again achieved.  Even if we determined that the  Board
had  the discretion to determine when additional payments to  the
system were required to maintain the System as financially sound,
the other provisions of chapter 3.85 demonstrate that the parties
understood the System to be financially sound when the System was
fully  funded  and  not when all members were receiving  enhanced
benefits.   Even under a deferential standard, then,  the  Boards
interpretation  would  not  be reasonable.   We  agree  with  the
Municipality  that  if the parties intended the  Municipality  to
have an express obligation to make payments in support of a given
level  of surplus, it would have expressly so provided as it  did
with minimum levels of funding.  We also concur that it would  be
rewriting the ordinance to impose such an obligation in the  name
of discretion.
          4.   The  unpredictable  costs  of  litigation  do  not
               warrant   distinct   treatment  from   actuarially
               predictable costs.
               
          The  Board asserts that its determination to treat  the
unpredictable effects of litigation differently from costs  which
can   be   reasonably  predicted  according  to  sound  actuarial
practices  is  a fundamental policy decision and  that  it  seems
reasonable  that the Municipality should be expected to  pay  for
[the]  unpredictable yet very real adverse impact [of litigation]
on  the  Retirement System.  It urges us to adopt Judge Christens
conclusion  that  the  impact  of  the  4-10  liability  can   be
distinguished  from other variables impacting the  Systems  costs
because  this impact was within the [Municipalitys] control.   It
was  created  by the Municipalitys wrongful breach of  its  labor
contract.   The  Municipality, on the  other  hand,  argues  that
retroactive  compensation  should  be  treated  like  all   other
compensation  and  its  unpredictability  is  irrelevant  to  its
constitutionality.
          The  plain  language  of  AMC 3.85  and  Policy  2000-4
supports Judge Hensleys interpretation that the risk of increased
actuarial  liability from litigation is inherent in  the  System.
There  are  express provisions for the calculation of retroactive
compensation   stemming  from  grievances,  arbitration   awards,
collective bargaining agreements, or court-ordered judgments, all
of  which  could  arise  from either  a  determination  that  the
Municipality  was in some way at fault or from a settlement  that
mooted  the  issue of fault.  The System by its  terms  therefore
does not contemplate treatment of grievances differently when the
Municipality  is at fault or simply because litigation  might  be
actuarially unpredictable.  Additionally, the concerns with fault
raised  by  Judge  Christen are mitigated  by  the  exclusion  of
statutory  penalties or punitive damages from the calculation  of
retroactive compensation under Policy 2000-4.
     C.   Requiring the System To Absorb Liability for Grievances
          Does  Not  Raise Constitutional Concerns Under  Article
          XII, Section 7.
          
          Under   article   XII,  section   7   of   the   Alaska
Constitution:
          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.
          
Judge  Christen  ruled that requiring the System  to  absorb  the
actuarial  impact  of the 4-10 grievance was an  unconstitutional
impairment  of accrued benefits in part because it increases  the
Systems  costs and impairs the ability of the System to withstand
future  contingencies, hastens the day when  plan  members  might
have  to  pay  future contributions, and reduces the  ability  of
members to receive surplus benefits.
          It  is  undisputed that the System is  currently  fully
funded,  and  that  the impact of the grievance  awards  did  not
result  in  impairment  of  benefits to  be  distributed  in  the
ordinary  course.  What the grievance awards did do was  increase
the  Systems costs and impact the ability of members  to  receive
surplus  benefits.   In  essence, Judge Christen  and  the  Board
characterize the actuarial loss resulting from the settlement  of
grievances  as  an impact on the System that has  the  effect  of
impairing  or diminishing the members rights.  But  even  if  the
actuarial loss had an impact, it does not follow that this impact
constitutes  a  change to the System or an impairment  of  vested
rights.
          1.   There was no change.
          We   interpret  the  concept  of  change  broadly  when
considering  whether changes to a benefit plan unconstitutionally
diminish  or  impair  accrued benefits.  In Sheffield  v.  Alaska
Public  Employees Association, Inc., we faced  a  change  to  the
actuarial tables used to calculate early retirement benefits that
resulted  in  lower  monthly benefits  than  members  would  have
received under the earlier actuarial tables.21  We made clear that
it  was the impact of any modifications to benefit plans, and not
their  form, that was dispositive when assessing whether a change
          was made and if so whether it was constitutionally infirm.22  We
held:
          Even though the statutory terms embodying the
          employees  contracts remained unchanged,  the
          effect on the individual employee is the same
          as  if the statute had previously promised  a
          specific  dollar amount in benefits and  that
          amount  was  reduced  through  the  amendment
          process.  .  .  .  [T]he form of  the  change
          should be disregarded in favor of its impact.
          As   stated  by  the  Massachusetts   Supreme
          Judicial  Court in interpreting  that  states
          law  protecting employees contractual  rights
          to retirement benefits:
          
               The  minimal meaning . . . is  that  the
               contract is formed when a person becomes
               a member by entering the employment, and
               he  is  entitled to have  the  level  of
               rights   and  benefits  then  in   force
               preserved  in  substance  in  his  favor
               without any modification downwards. .  .
               .  When  we speak of the level of rights
               and benefits protected by [this statute]
               we  mean  the  practical effect  of  the
               whole   complex   of   provisions    not
               excluding the [employees contributions],
               for an increase in the [rate thereof] is
               little  different from a  diminution  of
               the allowance.[23]
               
          But, as Judge Hensley concluded, allowing the System to
absorb losses from grievances did not change the basic operations
of  the  System,  even  though it increased the  Plans  actuarial
liability.  In form, then, it was not a change to the System.  It
was clear, even prior to the 2000 restatement of the System, that
grievances  could result in retroactive compensation.   And  this
retroactive  compensation could have adverse actuarial  liability
for  the  System and could impact the availability of  assets  to
withstand future contingencies through plan obligations, declines
in  investment  revenue, and inability to  fund  any  shortfalls.
Therefore,  it  was the routine functioning of  the  System  that
resulted in the loss.
          2.   There was no impairment to a vested right.
          While it is undisputed that there was an impact on  the
System, the question is whether the practical effect of the whole
complex  of provisions impaired a vested right.  The language  of
chapter  3.85 shows that enhanced benefits are not vested rights.
Under  AMC  3.85.015(OOO), vested benefit means an  immediate  or
deferred  benefit to which a member has gained a  non-forfeitable
right  under the provisions of this chapter.  Under AMC 3.85.010,
it is specifically stated that [t]his system is intended to be  a
contractual  relationship in accordance with  the  provisions  of
Article  XII, Section 7 of the Constitution of Alaska.  But  with
          respect to enhanced benefits, AMC 3.85.155(G) provides that [n]o
member  or beneficiary shall have a contractual right as  to  the
timing  of a distribution of enhanced benefits authorized by  the
board  nor  to receive a particular form of enhancement  benefit,
except as provided in this section.
          Other  provisions of chapter 3.85 further  support  the
contingent nature of enhanced benefits.  Anchorage Municipal Code
3.85.015(U) defines an enhanced benefit as a benefit created from
time    to   time   from   available   surplus   assets.    Under
AMC  3.85.155(D), if the Plan has 116% funding, the Board has the
authority  to approve the payment of enhanced benefits  from  the
surplus  assets,  but  [t]he form of  any  enhancement  shall  be
determined   in   the   sole  discretion  of   the   board.   And
AMC  3.85.155(H) provides that [a]ll enhanced benefits  shall  be
funded  solely from surplus assets and shall not be the actuarial
or  financial responsibility of the municipality.  This  combined
language demonstrates that enhanced benefits are not vested.
          The  Board  argues that the retirement  benefits  which
Judge  Christen correctly protected in this case are the  surplus
benefits which members of the System bought at the conclusion  of
the   litigation  in  Gallion  for  $40  million.   But  as   the
Municipality  responds, what the System bought was  a  contingent
right, not a vested right, to receive enhanced benefits if  there
was  a  surplus  in  the  System  and  the  Board  exercised  its
discretion to grant one.  Through normal operation of the System,
there  was  a  reduction in available assets, but  this  did  not
impair  a  vested right because [n]o member or beneficiary  shall
have  a  contractual right as to the timing of a distribution  of
enhanced  benefits  authorized by the  board  nor  to  receive  a
particular form of enhancement benefit.
          3.   Payment  of  the grievance did not  constitute  an
               impact  on  the  System  without  a  corresponding
               benefit  for  members of the System who  were  not
               part of the 4-10 litigation.
               
          In  Hammond  v.  Hoffbeck, we held that the  fact  that
rights in PERS vest on employment does not preclude modifications
of  the system; that fact does, however, require that any changes
in the system that operate to a given employees disadvantage must
be offset by comparable new advantages to that employee.24  Judge
Christen found that for those members of the Plan who were not  a
part of the 4-10 litigation, payment of the grievance constituted
an impact on the System without a corresponding benefit.
          The  Municipality  argues  that  Judge  Christen  erred
because it was an expectation of the Plan that some contingencies
would   arise   that  would  result  in  a  detriment   with   no
corresponding  benefit to all members, such  as  a  court-ordered
judgment  for  one  member.  This argument is  supported  by  the
remainder  of  our decision in Hoffbeck.  There, we  weighed  the
disadvantages of the reduced benefits against any advantages that
might  have  accompanied them, and concluded that, for  at  least
some  of  the  members  of  PERS prior  to  the  amendments,  the
disadvantages  of the amendments outweighed the benefits.25   But
noting   that  courts  must  construe  statutory  provisions   as
          constitutional where possible, we divided the public employees
into  three  groups,  with different results  attaching  to  each
group.26   We  noted  that the statute was  unconstitutional  for
enrollees hired before the effective date of the legislation  who
chose   not   to  receive  a  new  benefits  package,   but   not
unconstitutional as to the second group, enrollees  in  the  plan
prior  to  the  effective  date of the amendments  who  opted  to
receive the amended benefits.27  As for the third group, employees
who enrolled in PERS after the effective date of the legislation,
no  constitutional violation was found because [i]t  [was]  clear
that the changes made in PERS did not unconstitutionally diminish
any vested rights of members of the third group.28
          Here, the members of the System opted into the restated
Plan in 2000 with the understanding that retroactive compensation
might  impact the liabilities of the System and with notice  that
the right to enhanced benefits was contingent on the availability
of  surplus  assets within the System.  Therefore, there  was  no
change.
IV.  CONCLUSION
          The   System  provides  that  retroactive  compensation
stemming  from  the settlement of grievances will  be  calculated
into  compensation for the purposes of determining  benefits  and
will therefore result in increased costs to the System.  Allowing
the  System to absorb the impact of grievances therefore does not
constitute  a change to the Plan or impair a vested  right  under
the  Alaska  Constitution.   We therefore  REVERSE  the  superior
courts  determination in 3AN-03-04760 Civil  that  requiring  the
System to absorb the impact of the liability is unconstitutional,
and  AFFIRM  the  superior courts decision in 3AN-03-10273  Civil
that the Municipality is not required to absorb the impact.
_______________________________
     1    Municipality of Anchorage v. Gallion, 944 P.2d 436, 437-
38 (Alaska 1997) (Gallion I).

     2     Gallion  v.  Anchorage Police &  Fire  Ret.  Sys.  and
Municipality of Anchorage, Superior Court No. 3AN-98-04563 Civil.

     3     The conditional settlement also resulted in settlement
of  Gallion  I,  discussed  more fully below,  and  two  separate
lawsuits,  Woolsey v. Municipality of Anchorage,  Superior  Court
No.  3AN-93-05222 Civil, and Mower v. Municipality of  Anchorage,
Superior Court No. 3AN-97-07364 Civil.
     4    Superior Court No. 3AN-03-10273 Civil.

     5    Superior Court No. 3AN-03-04760 Civil.

     6     Ellison  v. Plumbers & Steam Fitters Union Local  375,
118 P.3d 1070, 1073 (Alaska 2005); Alaska Legislative Council  v.
Knowles, 86 P.3d 891, 893 (Alaska 2004).

     7     Schaub  v.  K & L Distribs., Inc., 115 P.3d  555,  559
(Alaska 2005).

     8    Rockstad v. Erikson, 113 P.3d 1215, 1219 (Alaska 2005).

     9    944 P.2d at 438.

     10    Id. at 442.

     11    Id.

     12    Id. at 443.

     13    Id.

     14     The  Board  also cites a number of cases  from  other
jurisdictions  for the proposition that Alaska is  not  alone  in
determining that the use of retirement assets for the benefit  of
the  plan  sponsor is constitutionally impermissible.  But  these
cases are only persuasive if we adopt the Boards characterization
of  the  Municipalitys  settlement of the Stillman  grievance  as
misdirecting plan assets, which we decline to do.

     15     978  F.2d 325 (7th Cir. 1992).  The Board also relies
upon  United  States v. City of Miami, 195 F.3d 1292  (11th  Cir.
1999),  which  is not on point.  It speaks only  to  whether  the
district  court  imposed an excessive remedy when  it  awarded  a
disproportionate thirty-five retroactive promotions when only two
would have been available absent discrimination.  Id. at 1297-98.

     16    City of Chicago, 978 F.2d at 327-30.

     17    Id. at 333-34.

     18     Universal Motors, Inc. v. Neary, 984 P.2d 515, 518-19
(Alaska 1999).

     19     DeNuptiis v. Unocal Corp., 63 P.3d 272,  277  (Alaska
2003).

     20    Id.

     21    732 P.2d 1083 (Alaska 1987).

     22    Id. at 1087-88.

     23    Id. at 1087 (citing Opinion of the Justices, 303 N.E.2d
320,  327 (Mass. 1973) (construing Mass. Gen. Laws ch. 32,  25(5)
(amended 1956)) (emphasis added by Sheffield court).

     24    627 P.2d 1052, 1057 (Alaska 1981).

     25    Id. at 1058.

     26    Id. at 1059.

     27    Id.

     28    Id.

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