Fields v. Elected Officials’ Retirement Plan – 2/20/2014

February 21, 2014

Arizona Supreme Court Holds That Senate Bill 1609’s Impairment of the Formula for Calculating Cost of Living Adjustments Owed to Beneficiaries of the Elected Officials Retirement Plan Violates Article 29, § 1(C) of the Arizona Constitution.

In 1998, the legislature amended A.R.S. § 38-818 to provide a formula for calculating cost of living adjustments (“COLAs”) for beneficiaries of the Elected Officials’ Retirement Plan (“EORP”).  That same year, Arizona voters approved Article 29 of the Arizona Constitution, which states in relevant part:  “Membership in a public retirement system is a contractual relationship that is subject to article II, § 25, and public retirement system benefits shall not be diminished or impaired.”  In 2011, the State enacted Senate Bill 1609 (“SB 1609”) which, among other things, altered the COLA formula by making it less likely EORP beneficiaries would receive a COLA and by decreasing the amount of any COLA they would receive.  Two retired judges brought suit on behalf of themselves and similarly situated beneficiaries to have SB 1609 declared unconstitutional and enjoin its application.  After a trial on the merits, the superior court ruled that SB 1609’s impairment of the COLA formula was unconstitutional.  EORP and the State timely appealed, and the Arizona Supreme Court granted EORP’s petition to transfer the appeal to that Court.

The Arizona Supreme Court affirmed.  The Court first held that the second clause of Article 29, § 1(C) provides protection in addition to that provided by the Contract Clause of Article 2, § 25, which is referenced in the first clause of Section 1(C).  While the first clause establishes that the Contract Clause applies to the general contract provisions of public retirement plans, the second clause specifically protects public retirement benefits.  Any other Construction of Section 1(C) would render the second clause redundant.

The Court next held that the COLA formula was a public retirement benefit subject to protection under Section 1(C) because A.R.S. § 38-818—in effect when Article 29 was adopted—makes clear that pension plan beneficiaries are “entitled” to receive increases pursuant to that formula.  The Court’s interpretation of the term “benefit” was supported by its decision in Yeazell v. Copins, 98 Ariz. 109, 402 P.2d 541 (1965), as well as decisions from jurisdictions that have similar constitutional provisions.   The Court then held that SB 1609 diminished EORP beneficiaries’ COLA benefit in violation of Article 28, § 1(C) by decreasing and preventing 4% COLAs that would have been awarded in 2011-2013, by making it less likely that future increases would be awarded at all, and by decreasing the amount of future COLAs.  

The Court rejected EORP’s arguments that EORP beneficiaries do not have vested rights in their COLA formula, explaining that because the formula is a “benefit” and part of the contract of employment, it is not contingent.  The Court also rejected EORP’s argument that Section 1(C) was subject to Article 29, Section 1(A)’s requirement that EORP be funded using actuarial methods and assumptions; nothing in Section 1(C) indicates that it would be qualified by any other provision. 

Justice Brutinel authored the unanimous opinion.