Since 1939, the City of Gadsden, Alabama has provided its firefighters with a pension program as part of their compensation. Firefighters initially belonged to a local program, the Policemen’s and Firemen’s Retirement Fund (PFRF). In 2002, concerns about the PFRF’s solvency led Gadsden to negotiate a new arrangement with these employees: the City, it was agreed, would terminate the local fund and move all of its assets, liabilities, and members into the Employee Retirement System of Alabama – a state-administered retirement fund. Like the PFRF, the ERS requires mandatory employee contributions to the pension fund. The employee contribution rate under ERS has changed over time, from 3.5% to 6%. The official ERS employee handbook explicitly stated that the “member contribution rate is determined by statute and subject to change by the Alabama Legislature.”
Saddled with the PFRF’s expansive unfunded liabilities, the City’s ERS account quickly went from 100% funded in 2001 to only 58.2% funded by 2007. Over this same period of time, Gadsden’s employer contribution rate increased from 1.51 % to 24.54%.
Faced with terrible investment returns as a result of the recession, the Alabama Legislature in 2011 sought to shore up the ERS by increasing the contribution rates paid by all Alabama state employees. For example, Alabama law enforcement officers, firefighters, and correctional officers saw their rates increase from 6% to 8.25% in 2011 and then to 8.5% in 2012. The 2011 law gave localities participating in the ERS the option of applying these state-level increases to their own employees. In August 2011, Gadsden accepted this invitation and increased employee contributions to 8.5%.
A group of firefighters sued the City, alleging that the increase in their contribution rate violated what is known as the “contracts clause” of the United States and Alabama constitutions. The federal Eleventh Circuit Court of Appeals rejected the lawsuit.
The firefighters argued that if they had over ten years of creditable service, they had a “vested” right to a contribution rate of 6% and that Gadsden’s decision to raise that contribution rate violated their constitutional rights. The argument in turn relied on the assumption that Gadsden made an implied promise – included in its employment contract with each individual firefighter – not to raise the contribution rate once a firefighter becomes eligible for pension benefits under the terms of the ERS.
The Court commented that “no party has produced the written agreement between the firefighter-employees and the City, nor is there much evidence about what the terms of such a writing might contain. We look instead to the statutory provisions that govern the ERS. When engaging in such a review, we must proceed cautiously both in identifying a contract within the language of a regulatory statute and in defining the contours of any contractual obligation.
“Here, the ERS – a public pension plan – can be fairly characterized as part of the compensation package that the City dangles to attract and retain qualified employees. Pensions are thus regarded as a species of unilateral contracts. The promise of a pension constitutes an offer which, upon performance of the required service by the employee, becomes a binding obligation.
“Nothing in the text of any Alabama statute suggests that the employee contribution rate is immune from change, even after an employee’s retirement benefits have vested. Employee contribution rates, moreover, were amended several times before the firefighters joined the ERS. Indeed, by our count, the contribution rate for various classes of ERS participants has been amended at least six times over the course of several decades.
“When deciding whether to join the ERS, the former PFRF members were on notice of these prior increases, including an increase only one year before, which applied specifically to firefighters. The firefighters also had access to the 2002 ERS employee handbook when choosing whether to accept Gadsden’s offer to change the terms of their pension. This handbook explicitly stated that the member contribution rate is determined by statute and subject to change by the Alabama Legislature. Taken together, this evidence indicates that whatever contractual terms preside over the employment relationship between the City and its firefighters, a promise to refrain from raising contribution rates is not one of them.”
Taylor v. City of Gadsden, 2014 WL 4548614 (11th Cir. 2014).