Arizona Supreme Court holds that the Arizona Constitution and contract principles prohibit the Legislature from changing the benefit increase formula and contribution rates for current members of the Elected Officials’ Retirement Plan.

In 1985, Arizona established the Elected Officials’ Retirement Plan (“EORP” or “the Plan”), a defined benefit pension plan open to elected officials and judges.  Members of EORP who fulfill certain requirements are entitled to a fixed pension upon retirement.  EORP is funded by a combination of member and State contributions, court filing fees, and investment returns.  If the Plan’s investments do well enough, retirees are eligible for a benefit increase calculated using a statutory formula.

Low investment returns in the early 2000s decreased EORP’s funding substantially.  As a cost-cutting measure, in 2011 the Legislature passed a bill changing the formula for calculating future permanent benefit increases for retirees and increasing the contribution rate for current members.  

A class of current judges sued EORP, arguing that the bill diminished and impaired their right to pension benefits in violation of the Arizona constitution’s Pension Clause, which provides that public retirement benefits “shall not be diminished or impaired,” and the Arizona Supreme Court’s holding in Yeazell v. Copins, 98 Ariz. 109 (1965), which extended contractual protections to pension benefits.  The State intervened to defend the bill.

On appeal, EORP and the State argued that (1) the benefit increase formula and contribution rate are not “benefits” and thus not protected by the Pension Clause; (2) the trial court erred by analyzing the bill under Yeazell; and (3) that even if the benefit increase formula and contribution rates are “benefits,” current employees are not vested in those benefits until they retire under A.R.S. § 38-810.02. 

The Court ruled against EORP and the State on all claims.  First, citing to its decision in Fields v. Elected Officials’ Retirement Plan, 234 Ariz. 214 (2014), the Court held that the benefit increase formula is a “benefit” under the Pension Clause.  (Fields involved the same change to the benefit increase formula at issue in Hall, except that it was brought by retired rather than current judges.)  The Court did not address whether the contribution rate was also a “benefit” under the Pension Clause, however, because it concluded that the contribution rate was protected by contract principles pursuant to Yeazell in any event.

In Yeazell, the court held that public pension benefits are contractual rights, as opposed to gratuities given in violation of the Gift Clause.  The Court interpreted Yeazell to mean that the specific terms of a public pension contract are protected from unilateral, retroactive changes.  Applying this reasoning, the Court determined that the current members of EORP have a vested contractual right to the specific contribution rate in place at the time they were hired.   The Court was not persuaded by EORP’s argument that under Yeazell, the parties’ mutual mistake regarding the actuarial soundness of the Plan justified the changes, and concluded that the Legislature’s unilateral change to contribution rate violated Yeazell and the Gift Clause.

The Court also rejected that A.R.S. § 38-810.02, which states that employees do not vest in retirement benefits until they are eligible to retire, means current EORP members do not vest in a particular benefit increase formula or contribution rate until retirement.  To avoid a conflict with Yeazell, the Court concluded that the statute must be read to mean only that the right to begin collecting pension benefits is contingent upon meeting eligibility requirements, not that employees do not vest in their interests in pension benefits at the outset of employment.

Justice Bolick, joined by Judge Trebesch, dissented in part and concurred in the judgment in part.  While agreeing with the majority’s conclusion regarding the benefit increase formula, the dissent disagreed with the majority’s analysis of the change to the employee contribution rate under Yeazell.  Drawing on the distinction made in Fields between pension benefits, which are absolutely protected under the Pension Clause, and the terms of the pension contract, which are protected under the Contracts Clause, the dissent concluded that contribution rates fall into the latter category.  The dissent criticized the majority for ignoring the Contracts Clause analysis entirely, and for ruling on the EORP’s mutual mistake defense instead of remanding for the trial court’s consideration.  

Note:  Due to their current membership in EORP, all justices other than Justice Bolick (who was appointed after EORP was closed to new members in 2013) recused themselves from this case.  Judges Howe, Butler, Cattani, and Trebesch sat by designation.

Judge Howe authored the opinion; Judges Butler and Cattani joined, with Judge Cattani specially concurring.  Justice Bolick dissented in part and concurred in the judgment in part, joined by Judge Trebesch.

Disclosure: Osborn Maledon attorneys were involved in this case.