L. Vernon Bates, et al. v. City of Richland

The Pensioners were each hired by the City of Richland as police officers
before March 1, 1970, and later retired with varying periods of service.
In 1959, Richland established the Richland Police Relief and Pension Plan
('Richland Plan') for its officers pursuant to chapter 41.20 RCW. All of
the Pensioners are retired participants in the Richland Plan. Each
Pensioner retired at the highest step available for his position.
In 1969, the Legislature combined all municipal police and firefighter
pension plans into a single statewide system. The Legislature created the
Washington Law Enforcement Officers' and Fire Fighters' Retirement System
('LEOFF I'), which became effective on March 1, 1970. RCW 41.26.040(2).
As police officers employed by Richland, all of the Pensioners became
participants in LEOFF I because their participation was mandated by RCW
41.26.040(2). LEOFF I is administered by the Department of Retirement
Systems ('DRS').

The LEOFF I legislation did not terminate the Richland Plan. Under
RCW 41.26.040(2), the Pensioners' service continued to be credited under
the Richland Plan and LEOFF I as benefits under both plans are coordinated.
Specifically,
RCW 41.26.040(2) provides that for purposes of computation of retirement
benefits, pensioner's 'creditability of service and eligibility for service
or disability retirement and survivor and all other benefits shall continue
to be as provided in such prior retirement act, as if transfer of
membership had not occurred.

The Pensioners' pension benefits are those specified in RCW 41.20.050 or
.060, which provide that each pensioner is entitled to a pension--based on
service or disability--of 'fifty percent of the amount of salary at any
time hereafter attached to the position' held by the retired member for the
year preceding the date of his retirement. (Emphasis added.) An
additional two percent of the salary attached to the position at retirement
must be paid to pensioners for each year of service over 25. RCW
41.20.050, .060.
When each Pensioner retired, his pension under LEOFF I was calculated and
paid by the DRS. If the LEOFF I pension was less than the pension
specified in
RCW 41.20.050 or .060, the difference was to be paid by Richland under the
Richland Plan. RCW 41.26.040(2). Hence, the combined pension payments
must equal the amount specified in RCW 41.20.050 or .060.
Until 1999, Richland maintained a step and grade salary structure for
managers in its police department. This salary structure provided for
steps or increments in the salary for each rank. Advancement from one step
to another within the same rank was based upon longevity of service and
satisfactory performance of duties. At the time of his retirement, each
Pensioner had advanced to and was being paid at the highest salary step for
his position.

The Pensioners contend--and Richland denies--that as each Pensioner
retired, Richland promised each Pensioner that they would receive a pension
equal to 50 percent of the salary for the highest step attached to the
position from which they retired. Nevertheless, the parties agree that
after each Pensioner retired, Richland paid each Pensioner a pension based
on 50 percent of the salary payable to the highest step attached to the
position from which he retired. This practice continued from 1959 until
1998.

In December 1998, pursuant to Resolution No. 92-98, Richland adopted a new
performance-based pay and classification plan. Richland contends that each
level of the step and grade system was based on a market rate for that step
and grade. Richland points out that under the step and grade system, there
was no method available for providing incentive or bonus payments to
current employees. Richland maintains that the new pay system replaces the
step and grade system with a unique performance-based system that uses the
market rate to establish the midpoint of the salary schedule. In
Richland's view, the ability to receive and retain payments over the salary
midpoint is earned by exemplary--as opposed to satisfactory--performance.
After the adoption of the performance-based system, Richland began paying
the Pensioners 50 percent of the midpoint of the salary range for the
position from which each had retired, rather than the highest step as had
been the practice since 1959. Hence, on January 1, 1999, Richland's
Pension Board calculated the pensions due the Pensioners at 2.8 percent
above the pensions paid in 1998, rather than at 50 percent of the highest
step in the 1999 pay schedule. For the calendar year 2000, Richland
increased the salary structure for active employees by 4 percent and also
increased Pensioners' pensions by 4 percent over the 1999 level. Effective
January 1, 2001, Richland increased the salaries for all active police
officers by 3.2 percent of the 2000 wage scale and provided a comparable
increase in the Pensioners' pensions. Although dissatisfied with the
method of calculation, each Pensioner has received an increase in his
retirement income. If the Pensioners' position is accepted, the cost to
Richland is estimated to consist of a lump sum payment of $46,007.58, and
annual costs of at least $20,000.

The Pensioners filed this action seeking a declaratory judgment under
chapter 7.24 RCW. After considering both the Pensioners' and Richland's
motions for summary judgment, the superior court granted Richland's motion.
The Pensioners appeal.

Standard of Review. When reviewing an order granting summary judgment,
this court engages in the same inquiry as the trial court, considering all
facts and reasonable inferences in the light most favorable to the
nonmoving party. Kahn v. Salerno, 90 Wn. App. 110, 117, 951 P.2d 321
(1998). Once the moving party has established that there is no dispute as
to any issue of material fact, the burden shifts to the nonmoving party to
establish the existence of an element material to its case. Id. Bare
assertions that a genuine material issue exists will not defeat a summary
judgment motion in the absence of actual evidence. White v. State, 131
Wn.2d 1, 9, 929 P.2d 396 (1997).

ANALYSIS

In Washington, pension rights are contractual rights that vest at the
beginning of the employment relationship. Bakenhus v. City of Seattle, 48
Wn.2d 695, 700, 296 P.2d 536 (1956). Pension rights vesting from the
inception of employment become property rights and may not be divested
unless the changes are equitable to the employee or are necessary to
maintain the flexibility and integrity of the pension system. Eagan v.
Spellman, 90 Wn.2d 248, 256, 581 P.2d 1038 (1978) (citing Bakenhus, 48
Wn.2d at 701).

Article I, section 23 of the Washington Constitution and article I, section
10 of the United States Constitution prohibit any form of legislative
action impairing existing obligations. Washington Fed'n of State Employees
v. State, 127 Wn.2d 544, 560, 901 P.2d 1028 (1995). The prohibition
against any impairment of contract is not absolute and the court uses a
three-part test to determine if there has been an impairment of public
contract:

1) is there a contractual relationship; (2) does the legislative action
substantially impair the contractual relationship; and (3) if there is
substantial impairment, is it reasonable and necessary to serve a
legislative purpose. Id. at 561 (citing Tyrpak v. Daniels, 124 Wn.2d 146,
151-52, 874 P.2d 1374 (1994)).
Article I, Section 23 Analysis. The Pensioners first contend that
Resolution
No. 92-98 impairs a vested contract right of the Pensioners in violation of
article I, section 23 of the Washington Constitution. Significantly, the
Pensioners concede the vested right at issue is a contractual right to a
pension in the amount specified in
RCW 41.20.050 or .060. Moreover, the Pensioners provide no evidence
regarding any additional promise made at the time of hire or at any other
time prior to retirement. Hence, the question here must be resolved in
reference to the statutory requirements and there is no impairment of a
vested contractual right unless the statutory requirements are not met. In
short, the issue here is whether the statutory provisions permit pensions
paid to officers retiring under the step and grade system to be calculated
using levels established as part of the new performance-based system.
Administrative Practice. The Pensioners next contend that Richland has
established a longstanding practice of calculating their pensions based on
the highest salary step for each position and that this administrative
practice has ripened into an enforceable contract right. To support this
argument, the Pensioners rely on cases such as Washington Federation of
State Employees v. State, 98 Wn.2d 677, 658 P.2d 634 (1983), Washington
Association of County Officials v. Washington Public Employees' Retirement
System Board, 89 Wn.2d 729, 575 P.2d 230 (1978), and Eagan v. Spellman, 90
Wn.2d 248. Simply stated, the Pensioners attempt to establish an
administrative practice of calculating pension benefits based on the
highest level for each position.

But this 'administrative practice' is not the right the Pensioners seek to
enforce. The parties agree that the Pensioners have a vested right to
receive a pension in the amount specified in RCW 41.20.050 and .060.
Consequently, each Pensioner is entitled to receive a pension based on
'fifty percent of the amount of salary at any time hereafter attached to
the position held by the retired member for the year preceding the date of
his retirement.' RCW 41.20.050. Each Pensioner retired at the highest
step available for his position and received a pension calculated at the
highest level because that was what was required under the statute. We
conclude that the question here should be resolved by reference to the
terms of the statute rather than by reference to evidence demonstrating an
administrative practice of paying pensions as required by statute.
Promissory Estoppel. In a similar vein, the Pensioners argue that based on
the doctrine of promissory estoppel, Richland is estopped from altering the
basis for calculating their pensions. Each of the Pensioners submitted an
affidavit stating that at the time he retired, he was being paid at the top
of the salary grade for his position. Each affiant states that when he
retired, he relied upon Richland's representation that his pension would be
50 percent of the highest salary step for his respective position. Again,
the promissory estoppel framework is inapplicable because the Pensioners
provide no evidence demonstrating that any promise was made other than a
promise to pay the pension benefits specified in chapter 41.20 RCW. Hence,
Richland's decision to recalculate the pensions must be evaluated in
reference to the statutory requirements, not the contents of a promise.
RCW 41.20.050 and RCW 41.20.060. The Pensioners seek to enforce the
pension rights specified in RCW 41.20.050 and .060. These statutes provide
a fluctuating pension that may change in order to maintain a proportionate
relationship to current salary levels. See Anderson v. City of Seattle, 78
Wn.2d 201, 202, 471 P.2d 87 (1970). Consequently, to prevail, Richland
must demonstrate that its decision to calculate the Pensioners' benefits by
using the midpoint of the performance-based system compensates the
Pensioners for the 'salary' attached to the 'position' that they held under
the step and grade system. We conduct this inquiry keeping in mind that
public pension legislation is liberally construed in favor of
beneficiaries. Hanson v. City of Seattle, 80 Wn.2d 242, 247, 493 P.2d 775
(1972).
RCW 41.20.050 and .060 suggest a two-step inquiry. First, a determination
must be made, if possible, as to what current position is comparable to the
position held by each Pensioner at retirement. Second, an inquiry must be
made to determine what elements of the salary attached to that position
must be included when calculating the pension benefits. RCW 41.20.005(2)
defines 'position' as 'the particular employment held at any particular
time, which may or may not be the same as civil service rank.' RCW
41.20.005(4) defines 'salary' as the basic monthly rate of salary or wages,
including longevity pay, but 'not including overtime earnings or special
salary or wages.

Under the step and grade system, the salary system provided for steps or
increments in the salary for each rank. Advancement from one step to a
higher step was based on longevity and satisfactory performance of duties.
Consequently, each Pensioners' 'position' is described in terms of the rank
and step attained at the time of retirement. The problem here is that
Richland has adopted a 'new and unique' pay system that purportedly allows
the employer to reward exceptional performance with bonus or incentive pay.
Clerk's Papers (CP) at 40.

Richland takes the position that the midpoint of the new salary scale for
each rank is determined by the same factors considered under the step and
grade system and that any payment above the midpoint represents bonus pay.
According to Richland, bonus pay constitutes 'special salary or wages'
under RCW 41.20.005(4) and must be excluded when pensions are calculated
under RCW 41.20.050 and .060. In short, Richland uses the limitations in
the statutory definition of 'salary' to foreclose any inquiry into a
comparison of the 'positions' under the two systems.
Where Richland frames its argument around the limitations contained in the
definition of 'salary,' the Pensioners center their argument on the fact
that each retired from the highest step for his respective 'position.'
According to the Pensioners, their pensions must always be calculated based
on the highest step for the rank they attained, regardless of any
underlying structural changes to the salary schedule. In effect, the
Pensioners suggest that any structural changes to the underlying salary
schedule will not affect their pensions even though both RCW 41.20.050 and
.060 provide for a pension based on the 'salary at any time hereafter
attached to the position' held by each Pensioner at retirement.

Case Law. Both the Pensioners and Richland find support for their
respective positions in the existing case law. Grabicki v. Department of
Retirement Systems, 81 Wn. App. 745, 916 P.2d 452 (1996), relied upon by
Richland, discusses the definitions of 'position' and 'salary.' In
Grabicki, LEOFF I pensioners sought to have compensation for post-high
school education included in retirement benefits calculated under
RCW 41.26.100. The applicable provision--like RCW 41.20.050 and .060--
calculated the pensioners' benefits based on the 'final average salary'
using the 'basic salary attached to such same position or rank at time of
retirement.' RCW 41.26.030(12)(a)(i); Grabicki, 81 Wn. App. at 749 n.3.
In Grabicki, the amount on the employee's 'final average salary' was
calculated from 'basic salary' under RCW 41.26.030(12). The definition of
'basic salary' under this provision--like the definition of 'salary' under
RCW 41.20.005(4)--defined 'basic salary' as 'the basic monthly rate of
salary or wages, including longevity pay but not including overtime
earnings or special salary or wages.' RCW 41.26.030(13)(a).
Mr. Grabicki argued that the term 'position' should be defined by the
collective bargaining agreement with the city. He maintained that when he
retired he was a member of paygroup 'PO5E' which designated an officer with
five years of service holding a B.A. degree. Grabicki, 81 Wn. App. at 752.
The court rejected this argument and applied the definition under RCW
41.26.030(21), which defined 'position' as 'the employment held at any
particular time, which may or may not be the same as civil service rank.'
Grabicki, 81 Wn. App. at 752. The court concluded that the work for which
Mr. Grabicki was paid was the performance of his duties as a police
officer. This position did not require the education he had achieved and
for which education incentive pay had been received. Id.
The Grabicki court went on to discuss the term 'basic salary' and concluded
that '{i}f performance of the duties of the position calls for special
training or risk for which extra compensation is paid, the compensation is
basic salary. Otherwise, compensation for special training is special
salary.' Id. at 753. The court also concluded that there was no logical
distinction between longevity pay and education pay, and that longevity pay
would be special salary but for the legislative policy recognizing and
rewarding long service. Id. at 754-55. The court reasoned that longevity
pay and education pay each represented 'compensation for individual
achievement beyond that required for performance of the duties of the
position.' Id. at 754.

In Chancellor v. Department of Retirement Systems, 103
Wn. App. 336, 12 P.3d 164 (2000), the Grabicki reasoning was applied to
resolve the question as to whether payments made in exchange of a waiver of
vacation leave constituted 'basic salary' for purposes of calculating LEOFF
I pensions. Chancellor, 103 Wn. App. at 338. Division Two concluded that
the additional pay was an elective individual option to convert vacation
time and the right to receive this pay was unique to the individual and not
attached to position or rank. Id. at 344. Significantly, the court
determined that the additional pay was not part of 'basic salary' because
it was not dependent on the attributes of the position. Id. at 345.

Applying the statutory language in light of the
analysis in Grabicki and Chancellor, the rule is that 'salary' includes
longevity pay and pay for the performance of duties attributed to the
pensioner's position. However, contrary to Richland's assertions, the
limitations contained in the statutory definition of 'salary' do not
resolve all questions related to the issue of 'position.' The Grabicki
court applied a two-step approach, first making a determination as to
'position' and then inquiring as to what portion of the position's salary
should be included when calculating pension benefits. The Chancellor court
limited its inquiry to a determination as to 'basic salary' because there
was no question as to which position was comparable to the one held by the
retiree. In contrast to Grabicki and Chancellor, here the fundamental
question is whether the 'positions' can be compared. For guidance on this
issue we turn not to the case law, but to an Attorney General Opinion
relied upon by the Pensioners.

Attorney General Opinion. The Pensioners rely on a 1992 Attorney General
Opinion to support a narrow construction of the word 'position.' Although
not controlling, Attorney General opinions are given 'considerable weight.'
Everett Concrete Prods., Inc. v. Dep't of Labor & Indus., 109 Wn.2d 819,
828, 748 P.2d 1112 (1988). In its opinion, the Attorney General answered
the following question:

If a city creates a new step in its civil service classification of
police officers and advances all officers at the next lower step to that
new step, are officers who retired at the next lower step entitled to have
their pensions under chapter 41.20 RCW based on the salary attached to the
new step?

24 Op. Att'y Gen. 1 (1992). The classification changes described in this
question are less disruptive than the structural changes made as part of
the Richland Plan because the new step increase was merely tacked onto the
salary classification system already in place. However, there is guidance
in the three cases relied upon by the Attorney General. They are: Dunham
v. Berkeley, 7 Cal. App. 3d 508, 86 Cal. Rptr. 569 (1970); Baldwin v. City
of San Diego, 195 Cal. App. 2d 236, 15 Cal. Rptr. 576 (1961); and City of
Long Beach v. Allen, 143 Cal. App. 2d 35, 300 P.2d 356 (1956).

Long Beach is particularly helpful because it presents
a factual situation that is similar to our case. In Long Beach, retired
police officers sought to have their pensions increased based on increases
given to active officers. Under the salary system in effect when the
plaintiffs were working, each rank was divided into two pay grades based on
longevity. Long Beach, 143 Cal. App. 2d at 37. After the plaintiffs
retired, the City of Long Beach established a new system that added three
new rates of pay, making a total of five. Officers advanced through the
first three steps based solely on longevity, but the last two increases
were based on merit and were payable upon the recommendation of management.
Id. At the time the new rates were established, the city specified that
the new salaries of active employees would be the same as or higher than
the employee's previous salaries, and all active employees were assigned to
the appropriate pay rate to ensure this result.

The plaintiffs, who retired at the highest rate of pay,
claimed that their pensions should be based on the salary of the current
employee who held the same position they held prior to retirement, rather
than the rate of pay that would apply based on the transition formula used
for active employees. Id. at 38. The court concluded that because of the
plaintiffs' right to a fluctuating pension, the current counterparts of
these retirees were the officers receiving the highest rate of pay under
the new five-step system. The court permitted the pensions to be based on
salary levels determined by a merit rating system because the new ordinance
operated to the retirees' detriment and violated vested contractual pension
rights. Id. at 40.

Based on Long Beach and the other cases, the Attorney
General concluded:

The principle that emerges from these case is that retirees'
fluctuating pensions should reflect structural changes made in the salary
schedule after retirement if the retirees would have benefitted from the
change had they continued working. In other words, if the retirees'
conduct while working establishes that they would have qualified for the
new step, higher rate of pay, or additional compensation associated with
the structural schedule change if still employed, then their pensions
should be based on the higher compensation.

Att'y Gen., supra, at 5.
We agree, but we also note that the Attorney General's
conclusions rest on the assumption that the positions are defined such that
a comparison is possible. The Pensioners here are entitled to receive a
fluctuating pension based on the 'salary at any time hereafter attached to
the position held by the retired member for the year preceding the date of
his retirement.' See RCW 41.20.050, .060. Additionally, under Washington
law, the definition of 'salary' contains limitations that are applicable
when calculating pensions. Keeping these limitations in mind, we must
examine Richland's performance-based system to determine, (1) whether the
new system is defined such that the current counterpart for each
Pensioner's position can be determined and, if so, (2) which portions of
that position's salary may be included in the calculation of the
Pensioners' pension.

Richland's Performance-Based Plan. Richland contends
that the salary
associated with the midpoint of a position under the performance-based
system constitutes the 'salary' for the position for purposes of the
calculation of pensions under RCW 41.20.050 and .060. To support this
argument, Richland submitted the affidavit of Roger Lenk, Richland's Human
Resources Director. According to Mr. Lenk, the salary levels established
under the step and grade system were calculated and adjusted based on
market averages for similar municipalities with similar classifications.
Mr. Lenk asserts that under the performance-based system, the market rate
is used to establish the midpoint of the salary range for a particular
position and any salaries awarded above the midpoint represent 'special
salary or wages.' CP at 40. Attached to Mr. Lenk's affidavit is a
document entitled 'Performance Appraisal System Guidelines and Procedures,'
(hereafter 'PAS') which explains the performance-based system in more
detail. CP at 45.

An examination of the PAS Guidelines reveals several problems. First,
as suggested by Mr. Lenk, the PAS Guidelines do provide that:
Employees shall only receive salary increases based on competent
performance up to the mid-point of the salary range. Advancement beyond
the salary grade mid-point shall be based solely on performance that
exceeds proficient performance levels for incumbents in the class.
Employees who perform at less than proficient levels shall not receive any
increase for that period.

* * *

Click the case caption above for the full text of the Court's Opinion.