In Cloutier v. State, No. 2010-714, 2012 N.H. LEXIS 42 (N.H.Mar. 30, 2012), a retired probate judge contested the validity of certain changes that the State of New Hampshire made to the Judicial Retirement Plan. 

Under the prior retirement statutes, “as additional compensation for services rendered and to be rendered,” a judge who retired upon attaining the age of seventy years having served as a judge for at least seven years, or upon attaining the age of sixty-five years having served for at least ten years, was entitled to receive for the rest of his or her life an annual amount equal to seventy-five percent of the currently effective annual salary of the office from which the judge was retired.  Under the new statute, effective in 2005, benefits were limited to seventy-five percent of the judge’s final year’s salary with the board’s discretion to award cost-of-living adjustments to retired judges up to an aggregate amount of $50,000 per year, and to award more than that amount with the approval of the legislature.  Under the new statute, the plan became self-funding, relying upon contributions from the State and the judges.

The judges alleged that the State’s action constituted an impairment of contract in violation of the New Hampshire Constitution.  The trial court found that the application of the changes to the Plan to judges who accepted their positions before its enactment in 2005 violated the Constitution’s contract clause.  The State appealed the court’s decision that the changes to the Plan violated the Constitution and argued that, at most, it is unconstitutional only as to those judges who met the service and age requirements for retirement as ofJanuary 1, 2005. 

The Supreme Court of New Hampshire stated that whether a public retirement plan creates a contract between a public employee and the State is a question of first impression inNew Hampshire.  Contract clause analysis inNew Hampshirerequires a threshold inquiry as to whether the legislation operates as a substantial impairment of a contractual relationship.  This inquiry has three components: (1) whether there is a contractual relationship; (2) whether a change in law impairs that contractual relationship; and (3) whether the impairment is substantial.  If the legislation substantially impairs the contract, a balancing of the police power and the rights protected by the contract clause must be performed, and the law may pass constitutional muster only if it is reasonable and necessary to serve an important public purpose.

The Court found the prior statute created an implied-in-fact contract between the State and the judges who entered into employment when the statutes were in effect, which vested when they were appointed to be judges, subject to attaining the age and service requirements.  The Court reasoned: “One of the primary purposes of providing benefits to public employees is to induce competent persons to enter and remain in public employment.  Benefits would serve as little inducement if they could be whisked away at the whim of the public employer.”

The Court went on to find an impairment of vested rights because the prior retirement statute based benefits on the most recent adjustments in judicial salaries, whereas the new statute based benefits on the amount the judge was being paid at the time of retirement.  As for whether the impairment was substantial, the Court remanded the case to allow the trial court to determine whether the impairment was offset by any compensating benefits.  The Court explained that prior to retirement, a plan may be changed only if there is a corresponding change of a beneficial nature to the employee. 

This case is noteworthy because as the Court indicated the prior retirement statutes stated unequivocally that judicial retirement pay was “additional compensation for services rendered.”  State and local governmental entities may be able to avoid creating implied vested contractual rights by de-linking, to the extent possible, retirement benefits from compensation.  We note as well that when a public employee’s retirement benefit becomes vested varies from state to state.  Some states have found that vesting occurs when an employee is hired.  Others have found that vesting begins when an employee actually retirees.  Still others have found that vesting begins when an employee is eligible to retire.