The 6th Circuit has ruled against a retired firefighter and a retired police officer from Lexington, Kentucky who sought to block efforts by Lexington-Fayette Urban County Government and the state legislature to reduce their pension cost-of-living allowances.
The case dates back to 2013, when Lexington Mayor Jim Gray sought to address a pension shortfall – not by funding the pension as required – but by reducing the pensioners’ cost-of-living allowances (COLAS). His idea met with support from other elected officials in Lexington-Fayette Urban County as well as the state legislature.
Retired police officer Tommy Puckett and retired firefighter Roger M. Vance challenged the COLA reduction as a violation of the US Constitution’s “Contract Clause”, along with some ancillary arguments of a due process “taking” and related state constitutional claims. The Contract Clause is found in Article I, and states that “No State shall…pass any…law impairing the obligation of contracts…” In essence, it prohibits a state or municipality from enacting a new law to extricate itself from a contractual agreement it has entered into.
Puckett and Vance filed suit on September 11, 2013 in US District Court, but the action was promptly dismissed. The 6th Circuit explained the District Court’s rationale as follows:
- The district court found that the existence of a claimed contractual right for purposes of a Contract Clause claim requires a clear indication that the legislature intended such a contractual right, and the Kentucky legislature never bound itself to calculating retirement benefits based upon an unchangeable COLA. Finding no such enforceable contract, the district court dismissed the Contract, Due Process, and Takings Clause claims, and also dismissed the state law claims…
The retirees appealed to the 6th Circuit, who upheld the District Court’s ruling. on Monday.
- The question here is one of first impression in this circuit: whether the legislature’s statutory scheme for reducing the extent of future COLA increases to retired county workers constituted an unconstitutional impairment of contracts, a denial of due process, or resulted in an unconstitutional taking.
- The starting point in this analysis is the Contract Clause, which provides that “[n]o State shall . . . pass any . . . Law impairing the Obligation of Contracts.” U.S. Const. art. I, § 10, cl. 1.
- The Supreme Court, however, does not interpret this wording as an absolute bar on the impairment of either governmental or private contractual obligations.
- Courts apply a two-part test to determine whether a state law violates the Contract Clause. First, courts ask “whether the change in state law has ‘operated as a substantial impairment of a contractual relationship.’” … If so, the court must then determine whether the impairment is justified as “reasonable and necessary to serve an important public purpose.” … But when the state itself is a party to a contract, “complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State’s self-interest is at stake.” …. The Supreme Court expressed this skepticism because “[a] governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”
- Whether the state law is a substantial impairment of a contractual relationship is analyzed in three parts: (1) whether there is a contractual relationship; (2) whether a change in law impairs the contractual relationship; and (3) whether the impairment is substantial.
- Upon our de novo review, we conclude that Plaintiffs did not plead facts demonstrating the existence of a contractual relationship establishing a vested contract right. And since we find no contract, we need not reach the issues of impairment or substantiality.
And with that judicial slight-of-hand, the case was over. A pension COLA in Kentucky is in the nature of a gift, not a contractual right.
Here is the decision: Puckett v Lexington15-6097-2016-08-15