Retired public safety officers didn’t have vested right to health insurance benefits in retirement

Because retired public safety officers, including police officers and fire fighters, didn’t have vested rights to health insurance benefits in retirement, a municipal employer did not unlawfully change their retiree health insurance benefits in order to reduce city expenses, ruled a federal district court in Michigan. Having found that the collective bargaining agreements that governed the retirees’ work conditions did not create a promise for retiree healthcare benefits beyond the term of the CBAs, and because the CBAs had expired, the retirees could not rely on the CBAs as a source of their protected interest.

Retiree benefits. A group of retired public safety officers filed a class action alleging that the city breached contracts and violated constitutional rights when it changed their retiree health insurance benefits in order to reduce city expenses. The officers were represented by various unions that had collective bargaining agreements with the city governing their terms and conditions of employment, including pension benefits and healthcare benefits for retirees.

In April 2013, a State of Michigan financial review team was appointed to review the city’s financial condition. The review team found that the city had delayed making $2.2 million in required pension contributions in order to manage cash flow; its pension plan had an unfunded actuarial accrued liability of $42.5 million; and its general operating fund was operating at a $3.3 million deficit. The review team concluded that a local government emergency existed and that the appointment of an emergency manager was needed to avoid a municipal bankruptcy.

Benefit reductions. In late 2013, the emergency manager recommended, among other measures to improve the city’s financial condition, temporarily reducing benefits for city retirees and post-65 retirees. In December 2013, he petitioned the state Treasurer to temporarily modify the healthcare benefits provided for several of the city’s bargaining units, which included the plaintiffs. Temporary changes were approved on January 27, 2014. Thereafter, several changes were made to existing retiree healthcare: (1) retirees were moved to a higher deductible plan; (2) prescription drug coverage was moved to a different tiered structure, whereby generic drugs maintain the existing copay amount but non-generic drugs require a higher copay; and (3) the city cancelled contributions to HSAs and Health Reimbursement Arrangements. In response, the retirees filed this lawsuit. The parties filed cross-motions for summary judgment.

Benefits vesting. The retirees’ claims in this lawsuit were dependent on whether the relevant CBAs guaranteed them vested retiree healthcare benefits, observed the court. Because the relevant CBAs had expired in 2011, unless the retirees’ welfare benefits vested and thereby continued beyond the duration of the agreements, there was no contract to breach or impair, no property right to take, nor any debt with which to interfere, observed the court. As such, the first issue the court was required to resolve was whether the relevant agreements conferred vested health insurance benefits on retirees.

In M & G Polymers USA, LLC v. Tackett, the Supreme Court overruled the long-standing presumption adopted by the Sixth Circuit in UAW v. Yard-Man, Inc., that retiree benefits provided in a CBA are guaranteed for the lifetime of any employee who retires under the CBA. In Tackett, the Supreme Court instructed courts to interpret CBAs “according to ordinary principles of contract law.” However, the Court did not rule out the possibilitythat a CBA may provide vested welfare benefits for retirees. Nevertheless, the Court stated that “when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.”

Here, the retirees asserted that their retiree healthcare benefits had vested. As an initial matter, the court noted that the CBAs contained absolutely no promise of health insurance coverage for any retiree. With respect to the retirees’ contention that the CBAs tied eligibility for retiree healthcare to eligibility for a pension, the court observed that they failed to identify any language in the CBAs suggesting that the reference to “full benefits” in the contracts was intended to include retiree health care. Rather, the agreements’ plain language strongly indicated that the term referred to pension benefits, only. Thus, there was no language in the relevant agreements tying pension and retiree health insurance benefits.

Durational clause. The court also rejected the retirees’ contention that the absence of a durational provision for retiree health insurance benefits, where other provisions contained specific durational clauses, indicated an intent to vest. In Tackett, the Supreme Court expressly rejected an inference that the absence of a specific durational clause for retiree healthcare benefits, in the face of specific limitations elsewhere, reflected an intent to vest those benefits.

Next, the court rejected the retirees’ effort to introduce extrinsic evidence to show that the parties intended to vest retiree healthcare benefits. Here, the court pointed out that if there was no ambiguity in the CBAs after applying traditional canons of contract interpretation, there was no basis to examine extrinsic evidence. In this instance, the court observed that there was nothing in the relevant CBAs suggesting an intent to extend retiree health insurance benefits beyond the term of those agreements. Thus, traditional principles of contract dictated that the contractual obligations ceased, in the ordinary course, upon termination of the bargaining agreement.

Because the CBAs had expired when the emergency manager instituted the changes to retiree health insurance coverage, and those benefits had not vested, the retirees no longer had a contractual right to receipt of those benefits. Finding that the retired officers did not have vested right to health insurance benefits in retirement, the court granted the city’s motion for summary judgment.

SOURCE: Serafino v. City of Hamtramck, (E.D. Mich.), No. 14-14112, September 27, 2016.

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