Decided: August 6, 2014
The Fourth Circuit held that the City of Baltimore did not violate the Contract Clause of the U.S. Constitution when it changed the method for calculating pension benefit increases.
The City of Baltimore (City) instituted a public pension plan for public safety employees and, in 1983, instituted a variable benefit. The variable benefit entitled retirees to a benefit increase if the plan’s investments earned more than 7.5 percent in the preceding year. In 2008, in response to budget deficits, the City replaced the variable benefit plan with a cost of living allowance (COLA), which increased benefits by a maximum of two percent each year. Under the variable benefit method, retirees’ benefits increased an average of three percent. Appellants, retired police officers and firefighters, filed a class action suit averring that the ordinance establishing the COLA violated the retirees’ rights under the Contract Clause. The test of whether a sovereign has violated the Contract Clause is a three-part inquiry. The court considers (1) whether an impairment exists, (2) whether the state law in question substantially impairs a contractual relationship, and (3) if the impairment is substantial, whether the impairment is permissible. Balt. Teachers Union v. Mayor of Baltimore, 6 F.3d 1012, 1015, 1018 (4th Cir. 1993).
The Court concluded that no contract impairment existed because the ordinance did not preclude the appellants from pursuing a breach of contract claim under state law; did not protect the City from paying damages arising out of a breach of contract; and did not create a statutory defense to a breach of contract claim. Additionally, Maryland law allows appellants to challenge whether the change to pension benefits was a reasonable modification and entitles plaintiffs to relief if the modification is unreasonable. Therefore, the Court reasoned that state law provides plaintiffs the necessary protection for breach of contract and the ordinance did not violate the Contract Clause.
Amanda K. Reasoner