PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1007
ROBERT F. CHERRY, JR.; ROBERT J. SLEDGESKI; JOHN
LEWANDOWSKI; CHARLES WILLIAMS, Individually and on behalf
of all persons similarly situated; BALTIMORE CITY FRATERNAL
ORDER OF POLICE, LODGE #3, INC.; BALTIMORE CITY
FIREFIGHTERS’ IAFF, LOCAL 734, on behalf of their members,
Plaintiffs - Appellees,
BALTIMORE FIRE OFFICERS UNION, LOCAL 964, INTERNATIONAL
ASSOCIATION OF FIREFIGHTERS,
Intervenor/Plaintiff – Appellee,
v.
MAYOR AND CITY COUNCIL OF BALTIMORE CITY, a municipal
corporation,
Defendant – Appellant,
and
BOARD OF TRUSTEES OF THE FIRE AND POLICE EMPLOYEES’
RETIREMENT SYSTEM OF THE CITY OF BALTIMORE, a body politic
and corporate; EDWARD J. GALLAGHER, in his capacity as
Director, Department of Finance; THOMAS P. TANEYHILL, in his
capacity as Executive Director, Fire and Police Employees’
Retirement System of the City of Baltimore,
Defendants.
No. 13-1115
ROBERT F. CHERRY, JR.; ROBERT J. SLEDGESKI; JOHN
LEWANDOWSKI; CHARLES WILLIAMS, Individually and on behalf of
all persons similarly situated; BALTIMORE CITY FRATERNAL
ORDER OF POLICE, LODGE #3, INC.; BALTIMORE CITY
FIREFIGHTERS’ IAFF, LOCAL 734, on behalf of their members,
Plaintiffs,
and
BALTIMORE FIRE OFFICERS UNION, LOCAL 964, INTERNATIONAL
ASSOCIATION OF FIREFIGHTERS,
Intervenor/Plaintiff – Appellant,
v.
MAYOR AND CITY COUNCIL OF BALTIMORE CITY, a municipal
corporation,
Defendant – Appellee,
and
BOARD OF TRUSTEES OF THE FIRE AND POLICE EMPLOYEES’
RETIREMENT SYSTEM OF THE CITY OF BALTIMORE, a body politic
and corporate; EDWARD J. GALLAGHER, in his capacity as
Director, Department of Finance; THOMAS P. TANEYHILL, in his
capacity as Executive Director, Fire and Police Employees’
Retirement System of the City of Baltimore,
Defendants.
No. 13-1116
ROBERT F. CHERRY, JR.; ROBERT J. SLEDGESKI; JOHN
LEWANDOWSKI; CHARLES WILLIAMS, Individually and on behalf of
all persons similarly situated; BALTIMORE CITY FRATERNAL
ORDER OF POLICE, LODGE #3, INC.; BALTIMORE CITY
FIREFIGHTERS’ IAFF, LOCAL 734, on behalf of their members,
Plaintiffs - Appellants,
and
2
BALTIMORE FIRE OFFICERS UNION, LOCAL 964, INTERNATIONAL
ASSOCIATION OF FIREFIGHTERS,
Intervenor/Plaintiff,
v.
MAYOR AND CITY COUNCIL OF BALTIMORE CITY, a municipal
corporation,
Defendant – Appellee,
and
BOARD OF TRUSTEES OF THE FIRE AND POLICE EMPLOYEES’
RETIREMENT SYSTEM OF THE CITY OF BALTIMORE, a body politic
and corporate; EDWARD J. GALLAGHER, in his capacity as
Director, Department of Finance; THOMAS P. TANEYHILL, in his
capacity as Executive Director, Fire and Police Employees’
Retirement System of the City of Baltimore,
Defendants.
Appeals from the United States District Court for the District
of Maryland, at Baltimore. Marvin J. Garbis, Senior District
Judge. (1:10-cv-01447-MJG)
Argued: May 14, 2014 Decided: August 6, 2014
Before TRAXLER, Chief Judge, and KEENAN and FLOYD, Circuit
Judges.
Affirmed in part, vacated in part, and remanded by published
opinion. Judge Keenan wrote the opinion, in which Chief Judge
Traxler and Judge Floyd joined.
ARGUED: James Patrick Ulwick, KRAMON & GRAHAM, P.A., Baltimore,
Maryland, for Appellant/Cross-Appellee. Charles Owen Monk, II,
SAUL EWING LLP, Baltimore, Maryland; Robert David Klausner,
KLAUSNER & KAUFMAN, PA, Plantation, Florida, for
Appellees/Cross-Appellants. ON BRIEF: Kevin F. Arthur, Jean E.
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Lewis, KRAMON & GRAHAM, P.A., Baltimore, Maryland; George
Nilson, Matthew W. Nayden, BALTIMORE CITY LAW DEPARTMENT,
Baltimore, Maryland, for Appellant/Cross-Appellee. Devin J.
Doolan, Jr., Geoffrey M. Gamble, Baltimore Maryland, Paul M.
Heylman, SAUL EWING LLP, Washington, D.C., for Appellees/Cross-
Appellants.
4
BARBARA MILANO KEENAN, Circuit Judge:
In this appeal, we consider certain constitutional
challenges related to a public pension plan sponsored by the
City of Baltimore (the City). The plaintiffs are active and
retired Baltimore police officers and firefighters who
participate in the plan (the members), as well as the unions
that represent them (together, the plaintiffs). The plaintiffs
primarily challenge the City’s decision changing the manner in
which annual increases to pension benefits are calculated,
claiming that the substitution of a cost-of-living adjustment
for a “variable benefit” violates the members’ rights under the
Contract Clause and the Takings Clause of the federal
Constitution.
After considering extensive evidence, the district court
concluded that the elimination of the variable benefit
constituted a substantial impairment of certain members’
contract rights, and that the impairment was not reasonable and
necessary to serve an important public purpose. The court
therefore held that the City had violated the Contract Clause,
and dismissed the Takings Clause claim as moot.
Upon our review, we conclude that the members’ rights under
the Contract Clause were not impaired, because the members
retained a state law remedy for breach of contract. Therefore,
we vacate the judgment of the district court with respect to the
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City’s elimination of the variable benefit. We also affirm the
court’s decision upholding the remaining portions of the
ordinance at issue, and vacate the court’s order dismissing the
Takings Clause claim. Accordingly, we remand for further
proceedings consistent with this opinion.
I.
In 1962, the City instituted a public pension plan (the
plan) that entitles eligible retired public safety employees to
a monthly pension benefit. The basic pension benefit is funded
by contributions of active members, annual contributions by the
City, and earnings on the plan’s investments. In 1983, the City
established a method by which retirees could receive increases
to their basic pension benefits (the Variable Benefit). The
Variable Benefit was a “gain-sharing mechanism” that did not
guarantee an increase in any given year. Instead, benefit
increases were dependent on the earnings yielded by the plan’s
investments in the prior year. Retirees were entitled to
receive a benefit increase if the investments earned more than
7.5% in the prior fiscal year. Under the Variable Benefit, all
the plan earnings between 7.5% and 10%, and half the earnings in
excess of 10%, would be designated for benefit increases. Any
such increases derived from the Variable Benefit compounded in
future years.
6
Since its inception, the Variable Benefit generated a
benefit increase more than half the time, and retirees received
an average increase of 3% annually. However, in recent years,
the percentage increase generally has been lower.
Beginning in 2008, the City encountered substantial budget
deficits that it was obligated to eliminate. The City
implemented several measures to reduce these deficits that were
unrelated to the plan, “including a hiring freeze, a pay freeze,
unpaid furloughs, layoffs, deferral of infrastructure projects,
rotating firehouse closures, reducing trash pickup, and cutting
library hours.”
About the same time, the plan’s actuary determined that
certain actuarial adjustments should be made to the plan to
improve the plan’s financial stability. To accomplish this
objective, the City would be required to pay annually an
additional $64 million into the plan, which would result in a
total annual contribution of $164.9 million. In light of these
financial difficulties, the City began to consider alternatives
to the Variable Benefit that would not require the City both to
bear the burden of poor investment performance and to forego
some of the investment gains in years of strong performance.
The City considered various options, including a proposal
from the employees’ unions, which recommended replacing the
Variable Benefit with a 2% annual cost of living adjustment
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(COLA) for all retirees. The City ultimately enacted Ordinance
10-306 (the Ordinance), the legislation at issue in this case,
which became effective in June 2010.
The Ordinance established a “Tiered COLA” under which
retirees age 65 and older would receive an annual COLA of 2%,
retirees age 55 to 64 would receive an annual COLA of 1%, and
retirees under age 55 would not receive any COLA benefit.
Through the Tiered COLA system, the City sought to provide the
largest annual increases to the oldest retirees, who were least
likely to have additional income from other sources. The
Ordinance also instituted other changes to the plan, including
increasing the retirement age, service, and member contribution
requirements.
The plaintiffs filed a class action lawsuit in the district
court, asserting that the Ordinance violated the members’ rights
under the Contract Clause and Takings Clause of the federal
Constitution. The plaintiffs’ complaint also alleged a claim
for breach of contract under Maryland law as well as several
other state law claims.
The district court initially determined that because the
substitution of the Tiered COLA for the Variable Benefit was the
only portion of the Ordinance that applied retrospectively, that
provision was the only part of the Ordinance subject to a
Contract Clause analysis. The court conducted two hearings to
8
determine the constitutionality of the change, and concluded
that the substitution of the Tiered COLA for the Variable
Benefit substantially impaired the contract rights of current
retirees and members who were eligible to retire but had not yet
done so.
The district court later evaluated whether the impairment
was permissible because it advanced an important public purpose.
The court concluded that the City had acted reasonably in
eliminating the Variable Benefit in order to stabilize the plan.
Nevertheless, the court held that by establishing the Tiered
COLA, the Ordinance violated the Contract Clause. The court
explained that the Tiered COLA system treated younger retirees
more harshly than older retirees, and that the impairment was
not necessary to achieve an important public purpose. The court
therefore declared invalid and unenforceable the portion of the
Ordinance eliminating the Variable Benefit and instituting the
Tiered COLA.
The district court dismissed the plaintiffs’ Takings Clause
claim as moot, and granted the parties’ agreed motion for a
voluntary dismissal without prejudice of the state law claims.
Both parties have appealed from the district court’s judgment.
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II.
We first address the City’s appeal. The City argues that
the plaintiffs’ Contract Clause claim is foreclosed, because the
Ordinance does not establish a barrier to obtaining relief for
breach of contract under Maryland law. The City contends that
the plaintiffs may maintain a contract action under Maryland law
on the basis that the City’s enactment of the Ordinance was not
a “reasonable modification” of the pension plan under the City’s
reserved legislative power. Therefore, the City asserts, the
district court erred in awarding any relief under the Contract
Clause.
In response, the plaintiffs contend that the City has
extinguished any state law remedy for breach of contract,
because the City has not waived all available defenses based on
its enactment of the Ordinance. The plaintiffs also maintain
that, by relying on its reserved legislative power to modify the
plan, the City has refused to pay damages for breach of contract
and has deprived the plaintiffs of a remedy under state law. We
disagree with the plaintiffs’ position, which essentially is an
assertion that the plaintiffs do not have a state law remedy for
breach of contract because the City has not conceded liability
in that regard.
The Contract Clause provides that “No State shall . . .
pass any . . . [l]aw impairing the [o]bligation of [c]ontracts.”
10
U.S. Const. art. I, § 10, cl. 1. The Clause prevents a state
from arbitrarily “reduc[ing] its financial obligations whenever
it want[s] to spend the money” elsewhere, but nevertheless
permits the state to modify its contractual obligations subject
to certain limitations. U.S. Trust Co. of N.Y. v. New Jersey,
431 U.S. 1, 26 (1977).
We conduct a three-part inquiry to “harmoniz[e] the command
of the Clause with the ‘necessarily reserved’ sovereign power of
the states to provide for the welfare of their citizens.” Balt.
Teachers Union v. Mayor & City Council of Balt., 6 F.3d 1012,
1015 (4th Cir. 1993) (citation and footnote omitted). In
reviewing an alleged Contract Clause violation, we ask: (1)
whether there has been an impairment of a contract; (2) whether
the state law has operated as a “substantial impairment of a
contractual relationship”; and (3) if there has been a
substantial impairment, whether the impairment is permissible
because it is “reasonable and necessary to serve an important
public purpose.” Id. at 1015, 1018 (citations omitted)
(emphasis in original).
Our initial inquiry focuses on whether the law in question
has effected an impairment of a contract. A state or
municipality does not “impair the obligation of contracts”
merely by breaching one of its contracts or by otherwise
modifying a contractual obligation. As we stated in Crosby v.
11
City of Gastonia, “[i]t would be absurd to turn every breach of
contract by a state or municipality into a violation of the
federal Constitution.” 635 F.3d 634, 642 n.7 (4th Cir. 2011)
(quoting Horwitz-Matthews, Inc. v. City of Chicago, 78 F.3d
1248, 1250 (7th Cir. 1996)). Thus, our task is not to decide
whether a breach of contract has occurred, but to determine
whether the City has erected a legal barrier “that [has]
prevented the [plaintiffs] from obtaining damages, or some
equivalent remedy, for [any] breach.” Horwitz-Matthews, 78 F.3d
at 1251.
If the plaintiffs retain the right to recover damages for
breach of contract, there is no impairment of contract under the
Contract Clause. Crosby, 635 F.3d at 642 n.7; see also Redondo
Constr. Corp. v. Izquierdo, 662 F.3d 42, 48 (1st Cir. 2011). As
the Seventh Circuit explained in Horwitz-Matthews, Inc. v. City
of Chicago, a city is permitted to raise any defense to breach
of contract in a state law action, except “a defense that even
if there was a contract and it was broken the [c]ity cannot be
liable because the repealing ordinance extinguished any remedy
that the [plaintiff] would otherwise have had.” 78 F.3d at
1252; see also Redondo Constr., 662 F.3d at 48.
In the present case, the Ordinance neither prevents the
plaintiffs from pursuing a state law breach of contract claim
nor shields the City from its obligation to pay damages should
12
it be found in breach of contract. Also, the City does not
cite any aspect of the Ordinance as a potential defense to the
plaintiffs’ assertion of a breach of contract claim. See
Council 31 of the Am. Fed. of State, Cnty. & Mun. Emps. v.
Quinn, 680 F.3d 875, 886 (7th Cir. 2012) (plaintiffs had no
Contract Clause claim when the state’s defense did not rely on
the court’s interpretation of the legislation being challenged).
Instead, the City relies on its reserved legislative power under
Maryland law, which the City contends provides the needed
authority for replacing the Variable Benefit with the Tiered
COLA. 1
Under Maryland law, the contract or vested rights of
employees “are subject to a reserved legislative power to make
reasonable modifications in the plan, or indeed to modify
benefits if there is a simultaneous offsetting new benefit . . .
.” See City of Frederick v. Quinn, 371 A.2d 724, 726 (Md. Ct.
Spec. App. 1977) (emphasis added). To qualify as a “reasonable
modification,” a revised plan must provide the employees with
1
The City also argues that it was not obligated under the
terms of the original contract to continue the Variable Benefit
prospectively. In support of this contention, the City relies
on plan language pre-dating the Ordinance, which stated that
“any benefit increase . . . is not and does not become an
obligation” of the City. This defense to a breach of contract
claim has no bearing on the plaintiffs’ ability to seek relief
under state law, because the plaintiffs claim that the passage
of the Ordinance breached the contract.
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“substantially the program [they] bargained for and any
diminution thereof must be balanced by other benefits or
justified by countervailing equities for the public’s welfare.”
Id. In articulating this rule, the Court of Special Appeals of
Maryland recognized that the needs of the government may change
over time as new employees draw on pension funds, requiring
modifications to ensure the “soundness of the fund.” Id.; see
also Saxton v. Bd. of Trs., 296 A.2d 367, 369 (Md. 1972) (“In
all states municipal corporations may make reasonable
modifications of a pension plan at any time before the happening
of the defined contingencies.”).
The reasonable modification principle articulated by
Maryland’s courts verifies that the plaintiffs have an
opportunity to litigate a breach of contract claim under state
law. If the City’s defense is unsuccessful and a court
determines that the City has a contractual duty to the members
and that the modification of the plan is unreasonable under
Maryland law, the plaintiffs may be entitled to relief. Because
the Ordinance does not foreclose any such claim by the
plaintiffs, the City has not extinguished the plaintiffs’ remedy
14
under state law by enacting the Ordinance. 2 Accordingly, the
plaintiffs do not have a viable Contract Clause claim. 3
Our conclusion is not altered by the plaintiffs’ assertion
that, absent a holding in their favor, the City will have
unfettered discretion to breach its contracts with public
employees and, therefore, any contracts to which the City is a
party will lack mutuality. This contention lacks merit because,
under Maryland law, the City is only permitted to make
reasonable modifications to its pension plans and is required to
provide members with a substantially similar program after such
modifications. See Quinn, 371 A.2d at 726. Any reduction in
benefits “must be balanced by other benefits or justified by
countervailing equities for the public’s welfare.” Id.
In view of this protection afforded under state law for
breach of contract, we will not apply the Contract Clause to
“require a State to adhere to a contract that surrenders an
essential attribute of its sovereignty” by creating irrevocable
2
We disagree with the plaintiffs’ characterization of the
rule in Horwitz-Matthews and Crosby as constitutional avoidance
or abstention. Instead, we hold that no Contract Clause
violation has occurred because the plaintiffs are unable to
demonstrate an impairment of the members’ contract rights.
3
Because the Ordinance has not impaired the members’
contract rights, we do not address the City’s alternative
arguments that any impairment was insubstantial, and that the
Ordinance was reasonable and necessary to achieve an important
public purpose under Baltimore Teachers Union.
15
contract rights binding on all future legislatures. U.S. Trust
Co., 431 U.S. at 23. We hold that the plaintiffs’ allegations
constitute “nothing more than a mere breach of contract, not
rising to the level of a constitutional impairment of
obligation,” Crosby, 635 F.3d at 642, and we vacate the district
court’s judgment finding the City in violation of the Contract
Clause.
III.
We briefly address the plaintiffs’ cross-appeal. The
plaintiffs argue that the district court erred: (1) in rejecting
their additional Contract Clause claims challenging other
aspects of the Ordinance; and (2) in dismissing the plaintiffs’
Takings Clause claim as moot.
The challenged provisions of the Ordinance at issue in the
cross-appeal involve the increase in the age and service
requirements for retirement eligibility, the use of a member’s
prior 36 months’ salary rather than prior 18 months’ salary to
calculate the basic benefit, the increase in required member
contributions over a period of years, the reduction in the
interest rate on member contributions, and a change in the
eligibility requirements for the deferred retirement option
16
plan. 4 The plaintiffs argue that the district court erred in
holding that the members do not have “vested” constitutional
rights upon the commencement of their employment and, therefore,
that the court wrongly concluded that these provisions of the
Ordinance do not retrospectively impair the members’ rights
under the Contract Clause.
In advancing this argument, the plaintiffs cite Article 22,
Section 42 of the Baltimore City Code, which provides:
Upon becoming [a member of the plan], such member
shall thereupon be deemed to have entered into a
contract with the Mayor and City Council of Baltimore,
the terms of which shall be the provisions of this
Article 22, as they exist at the effective date of
this ordinance, or at the time of becoming a member,
whichever is later, and the benefits provided
thereunder shall not thereafter be in any way
diminished or impaired.
Relying on this provision, the plaintiffs assert that any
unilateral modifications of the plan made by the City impair the
members’ rights under the Contract Clause.
We need not decide whether the district court correctly
held that Section 42 does not create constitutionally protected
rights upon the commencement of a member’s employment. Even if
we assume, without deciding, that such rights exist, our holding
under Crosby governs our consideration of the plaintiffs’ claim
4
We observe that these provisions apply only to a subset of
plan members, namely, active members for whom the Ordinance does
not provide a “grandfather” exception.
17
that the remaining provisions of the Ordinance violate the
Contract Clause. As with the Ordinance’s elimination of the
Variable Benefit, the plaintiffs also may seek a state law
remedy for breach of contract related to the other portions of
the Ordinance. 5 The members therefore have not established an
impairment of their rights under the Contract Clause.
Accordingly, we affirm the district court’s judgment upholding
the Ordinance with respect to these claims.
The plaintiffs also appeal the district court’s dismissal
of their Takings Clause claim. The Takings Clause prohibits the
taking of private property for public use, without just
compensation. U.S. Const. amend. V, XIV. In their complaint,
the plaintiffs asserted that by eliminating the Variable
Benefit, the City has effected a per se taking of the members’
property without just compensation in violation of the Takings
Clause. After issuing its ruling on the Contract Clause claim,
the district court dismissed the plaintiffs’ Takings Clause
claim as moot. The court reasoned that any relief the
plaintiffs could obtain on their Takings Clause claim would be
duplicative of the relief awarded on their Contract Clause
5
We express no opinion regarding whether the plaintiffs
will be able to establish the necessary elements of breach of
contract under Maryland law, or the merits of the City’s
possible defenses related to these provisions.
18
claim, other than the possibility of discretionary attorneys’
fees that the court was not inclined to award.
Given our determination that the plaintiffs have failed to
establish a Contract Clause violation, the plaintiffs’ Takings
Clause claim no longer is moot. And, because the district court
did not address the substance of the Takings Clause claim, we
vacate the court’s order with respect to this claim and remand
it to the district court to decide in the first instance. 6
IV.
In conclusion, we vacate the district court’s judgment
finding the City in violation of the Contract Clause with
respect to the Tiered COLA, affirm the court’s judgment
upholding the remaining portions of the Ordinance challenged in
the Contract Clause claim, vacate the court’s order dismissing
the Takings Clause claim, and remand the case to the district
court for further proceedings consistent with this opinion.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED
6
The plaintiffs may attempt to refile in the district court
their state law claims that were dismissed without prejudice, or
they may initiate proceedings in state court alleging breach of
contract under Maryland law. If the plaintiffs choose to pursue
either of these two courses of action, the district court may
wish to hold any proceedings regarding the Takings Clause claim
in abeyance pending the resolution of related contractual
issues.
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