Eleventh Circuit Decides Raise in City Firefighters’ Pension Contribution Rate Is Not an Impairment of Contractual Rights

The issue presented in Taylor v. City of Gadsden, No. 13-13885 (11th Cir. Sep. 16, 2014) was whether the City of Gadsden, Alabama’s decision to raise its city firefighters’ rate of contribution to Gadsden’s employee pension program impaired the firefighters’ contractual rights under the U.S. Constitution and the Alabama Constitution.

Throughout the 2000s, Gadsden’s employee pension fund was operating at a substantial loss. The fund was paying benefits to retirees much more quickly than it was receiving contributions, and in 2011, Gadsden anticipated having to pay 24.43% of its employees’ total compensation out of public funds in order to prevent default. Such an expenditure of public funds would have contributed to an estimated $1.5 million shortage in the city’s annual budget.

In an effort to rehabilitate its pension program, Gadsden resolved to raise its employees’ pension contributions by 2.5% of their total compensation. The city’s resolution was pursuant to an Act passed by the Alabama legislature requiring such an increase for state employees and allowing localities like Gadsden to do the same. In response, a group of Gadsden firefighters brought suit against the city, claiming that the contribution rate increase impaired their employment contacts, in violation of Article I, § 10 of the United States Constitution and Article I, § 22 of the Alabama Constitution. The District Court dismissed the firefighters’ complaint for failure to show any impairment of contractual rights, and the firefighters brought this appeal to the Eleventh Circuit.

The Eleventh Circuit held that the prohibition against the impairment of contracts did not apply to Gadsden’s resolution. Since Article I, § 10 of the United States Constitution and Article I, § 22 of the Alabama Constitution only prohibit a state from passing “law[s]” that impair contracts, the court reasoned that those prohibitions are directed against legislative action only. Taylor, No. 13-13885 at 15. Furthermore, the court continued, Gadsden’s exercise of its option, per state legislation, to raise the pension contribution rate was not a legislative action, and it did not bear “the imprimatur of the State’s legislative authority.” Id. at 16. Therefore, the court concluded, the district court’s decision is affirmed because the only law that the firefighters claimed was violated does not apply.

The court, however, issued two alternative rulings. First, the court ruled, even if the United States and Alabama Constitutions’ prohibition against the impairment of contracts applied, the firefighters failed to show that their contractual rights had been impaired. The court noted that the firefighters had been on notice that the pension contribution rate was subject to change, and that the statutory provisions governing the employee pension fund did not contain any proscription against raising the rate. Furthermore, the court reasoned, Gadsden altered the firefighters’ pension obligations, not their pension benefits. The increased contribution rate did not affect the firefighters’ compensation for work already performed. Rather, it affected only the amount of promised compensation, which Gadsden is free to amend.

Finally, the court ruled, at most Gadsden breached a contract, not impaired one. The court cited authority that a violation of a contractual right counts as an “impairment” only if there is no remedy in damages for the violation. Here, the court reasoned, had the firefighters’ contractual rights been violated, the city would have been liable for damages. Therefore, the court ruled, Gadsden’s contribution rate increase could not have impaired the firefighters’ contractual rights.

Ultimately, the City of Gadsden, Alabama’s decision to raise its city firefighters’ rate of contribution to the City’s employee pension program did not impair any contractual rights.

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