Request By:
Mr. Pat N. Miller
Executive Secretary
Teachers' Retirement System
Commonwealth of Kentucky
216 West Main Street
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; John Stephen Kirby, Assistant Attorney General
This letter is in response to your letter of October 21, 1981, in which you raise a question concerning the interpretation of KRS 161.714. Your concern centers on whether certain restrictions (such as setting a maximum salary limit for which retirement credit will be allowed) may be mandated for future or current members of the retirement system.
The statute in question, KRS 161.714, reads as follows:
"161.714 Inviolable contract
It is hereby declared that in consideration of the contributions by members and in further consideration of benefits received by the state from the member's employment, KRS 161.220 through 161.710 shall constitute an inviolable contract of the Commonwealth, and the benefits provided herein shall not be subject to reduction or impairment by alteration, amendment or appeal."
Two important points are clear on the face of the statute. The first is that the member has an inviolable contract with the Commonwealth in regard to the retirement benefits which he may expect. In the Opinion of the Attorney General 78-4, which reviewed similar statutory authority for other Kentucky Retirement systems, it is stated:
"It is our opinion that, in light of the foregoing statutory authority, the Commonwealth has created a contractual obligation with the members of the various retirement systems as a consequence of which the General Assembly cannot limit retirement benefits to certain maximum percentages of final annual salary as suggested in your letter. We believe that such a limitation on the members of those systems, both retired and non-retired, would be in direct violation of the aforementioned state and federal constitutional provisions."
The constitutional provisions to which OAG 78-4 refers are Kentucky Constitution Section 19 and United States Constitution Article I, Section 10. Both constitutional provisions prohibit ex post facto laws and any law which would impair a contractual obligation.
As OAG 78-4 indicates, the trend in public retirement system law is that, with or without specific statutory language, the courts have often found a contractual relationship between the member and the state or local government with which he is employed. The basis for such view being that his expectant retirement benefits are in the nature of deferred compensation for services performed. Several citations are offered in support of this position in OAG 78-4.
The membership of the system is composed of "all new teachers and all present teachers. " KRS 161.470(2), and KRS 161.220(5) and (6). Therefore the contract is not merely between the retired members of the system and the Commonwealth; but between the present teachers and all new teachers and the Commonwealth.
The second point which is evident on the face of KRS 161.714 is that benefits provided within the statutes governing the retirement system cannot be reduced or impaired "by alteration, amendment or appeal." As the contract between the members and the Commonwealth includes not only retired members, but present and new teachers as well, the prohibition on reduction and impairment applies to all equally. In other words, the General Assembly may not enact any law which would impair or reduce the expected retirement benefit of any present or new teacher or those received by retired members.
The question follows of whether the General Assembly may amend the current law governing the Teachers' Retirement System in any way. Certainly any amendment which would not reduce or impair benefits is not prohibited. It is our opinion that other amendments may be possible, but only if clearly warranted. In Wagoner v. Gainer, 279 S.E.2d 636, at 645-646 (W.Va. 1981) the Court wrote:
"Legislative modifications to a pension plan must be reasonable, and the test for reasonableness is whether the alteration to the pension scheme serves to keep the system sound and flexible. . . .
While the law recognizes that states retain some reserve power to modify by statute existing contractual relationships when the public interest so requires, such modifications must be reasonable and necessary to serve important public purposes. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, at 242, 98 S. Ct. 2716, at 2721, 57 L. Ed. 2d 727 (1978); Marvel v. Dannemann, 490 F.Supp. 170, at 175 (D.C. Del. 1980). It follows that when a statutory modification attempts to change important provisions of an existing contract outside the limits of the reserved state powers, the legislation will impair obligations of the contract and will be declared unconstitutional."
The retirement system statutes may of course be amended to affect those individuals who will become members of the system on a future date.
Our opinion is based on our interpretation of KRS 161.714. It is, of course, possible that a court of law may reach a different conclusion. To the extent that this opinion differs from OAG 78-4, that opinion is hereby modified.