STRUCKMEYER, Vice Chief Justice.
Appellant Kenneth G. Yeazell, having completed in excess of twenty years of service with the Police Department of the City of Tucson, requested retirement effective May 3, 1962. The Police Pension Board of Tucson retired appellant, fixing the amount as directed by the 1952 amendment to the Police Pension Act of 1937, A.R.S. § 9-923. Appellant brought an original action for declaratory judgment in the superior court asserting that his retirement should be computed in accordance with the 1937 act as it existed at the time he entered the service of the Police Department of the City of Tucson in 1942. From an adverse judgment, he appeals.
By the act of 1937, § 16-1808, A.C.A. 1939, appellant was entitled to be retired with a monthly pension equal to one-half of his average monthly compensation for one year immediately prior to the date of retirement. The 1952 amendment, Ch. 93, § 3, Laws of 1952, provides for retirement at the rate of one-half of the average monthly earnings for five years immediately prior to the date of retirement. The computation of appellant's pension under the 1952 amendment gives him $7.21 a month less retirement pay than if computed under the 1937 act. There is no claim made nor is there any suggestion from the facts presented that appellant may have waived or is estopped to claim the benefits given to him by the 1937 act.
The question of the extent of the vesting of pension rights of a public employee is not without some difficulty. The appellate courts of thirty-five states have had presented either the identical problem we have here or related problems. See annotation 52 A.L.R.2d and the four prior annotations, 137 A.L.R. 249, 112 A.L.R. 1009, 98 A.L.R. 505 and 54 A.L.R. 943. As stated by the annotator in 52 A.L.R.2d at 441:
Twice before we have interpreted the provisions of the 1952 amendment. Robinson
A great majority of the states have followed the common law in holding that a pension is a gratuity to which no rights vest in the pensioner; e.g., McCarthy v. State Board of Retirement, 331 Mass. 46, 116 N.E.2d 852. But in Arizona the common law is binding only insofar as it is found applicable, A.R.S. § 1-201. By the Constitution of Arizona, Art. 9, § 7, A.R.S., the granting of a gratuity by the legislature is forbidden:
It is plain that in this state pensions cannot be sustained as constitutional unless anchored to a firmer basis than that of a gift.
While a moral obligation is sufficient to support a claim which may constitutionally be recognized, Fairfield v. Huntington, 23 Ariz. 528, 205 P. 814, 22 A.L.R. 1438, the various retirement acts for public employees in Arizona cannot be upheld unless the state or political subdivision enters into a legal obligation founded upon a valuable consideration. The state may not give away public property or funds; it must receive a quid pro quo which, simply stated, means that it can enter into contracts for goods, materials, property and services.
In 1954, the Supreme Court of Pennsylvania, in recognizing the shift from the concept of a gratuity to that of deferred compensation for services rendered, said:
The California Supreme Court forty-seven years ago in O'Dea v. Cook, 176 Cal. 659, 169 P. 366, in construing a constitutional provision of similar meaning to Arizona's, rested the decision on the basis we find controlling here:
Notwithstanding that the state can only part with its money or property by agreement and for a valuable consideration, this Court in Denney, supra, referred to the right of retirement as "in the realm of quasi-contracts" and in Robinson, supra, as a "contingent interest" and an "expectancy", all ambivalent terms having no fixed significance. Thereby, appellant was relegated to a second-class status as if the government had a special standing to renege on the terms of employment after the contract has been entered into and part performance has taken place — a status which recognized neither moral responsibility nor legal obligation.
As a contract, certain principles of law are apparent. That the laws of the state are a part of every contract has been repeatedly decided under a variety of circumstances, American Federation of Labor
A.R.S. § 9-925 provides a member of the police department whose membership began prior to July 1, 1952, and who serves the department twenty years in the aggregate may, upon application, be retired. It is, therefore, one of the conditions of appellant's contract of employment that if he completes twenty years of service Tucson promises certain deferred payments as retirement. This is a condition precedent to liability by the municipality for retirement benefits. A condition is a fact which "must exist or occur before a duty of immediate performance of a promise arises, in which case the condition is a `condition precedent.'" Restatement of the Law of Contracts, § 250(a). Under paragraph d. of § 250 may be found this comment:
That an applicant for retirement may not earn the right to benefits because he does not perform the condition does not mean that from the moment of entrance into the service of Tucson as a police officer there is not a firm, binding contract.
It should, at this point, be recognized that public employment seldom pays on the same scale as private enterprise for the same services. The consideration of promised retirement is in private industry a major inducement both for the entrance into by superior personnel and their continuation in employment and avoidance of the expense of labor turnover. See Psutka v. Michigan Alkali Co., 274 Mich. 318, 264 N.W. 385. Government, with its various public agencies, enters into areas on a scale so vast and to such an extent as to have scarcely been conceived fifty years ago. To the end that the public service may be improved, the legislature has authorized the state and its various subdivisions to establish retirement and pension plans. These plans are not dependent upon the benevolence of the employing agency but are prescribed by the legislature and the conditions of the
Other states, and we believe those having the better rationale, have reached the same conclusion that the right to a pension becomes vested upon acceptance of employment.
And see the cases and authorities cited in both the majority and dissenting opinions in Robinson v. Police Pension Board, supra.
The holdings of Robinson and Denney that an employee does not have the right to any fixed or definite retirement benefits but only to a substantial or reasonable pension is incompatible with the concepts we have expressed. A contract cannot be unilaterally modified nor can one party to a contract alter its terms without the assent of the other party, see e.g. Newhall Land and Farming Co. v. Hogue-Kellogg Co., 56 Cal.App. 90, 204 P. 562; Trowbridge v. Jefferson Auto. Co., 92 Conn. 569, 103 A. 843; York v. Central Illinois Mutual Relief Association, 340 Ill. 595, 173 N.E. 80; Becker v. Faber, 280 N.Y. 146, 19 N.E.2d 997, 121 A.L.R. 1010; Friday v. Regent Improvement Co., 330 Pa. 481, 199 A. 914; Nelsen v. Farmers Mutual Auto Ins. Co., 4 Wis.2d 36, 90 N.W.2d 123. As the Illinois Supreme Court stated in York v. Central Illinois Mutual Relief Association, supra:
In passing upon the precise point here made, the Supreme Court of Washington in Bakenhus v. City of Seattle, 48 Wn.2d 695, 296 P.2d 536, approved this language from Baker v. Retirement Board of Allegheny County, 374 Pa. 165, 97 A.2d 231, 233:
Nor may the legislature reduce the amount of the contributions to the fund if thereby the soundness of the fund is jeopardized.
The legislature amended the 1937 statute which was a part of appellant's contract of employment with the City of Tucson. Tucson now attempts to apply the changes retroactively to vary the terms of its contract with appellant. We hold the changes, if applied to appellant without his assent, would constitute an alteration, a modification of his contract. This Tucson may not do.
In the instant case, appellant attempted to establish in the trial court that the Pension Plan of 1937 as it was placed in operation by Tucson was actuarially sound. This is not appellant's burden. If the pension plan was actuarially unsound when it was amended in 1952, the law governing mutual mistakes of fact is applicable in that both Tucson and appellant labored under the mistaken assumption that there was a fund sufficient to afford appellant and the other beneficiaries of the fund the amount provided by the act. A mutual mistake of fact may apply to the existence of the subject matter of the contract, see Corbin on Contracts, § 600, "Mistake as to Existence of Subject Matter Necessary to Performance."
It is not appellant's burden to show the lack of grounds for a recission or a modification of the contract. The party who asserts a fact has the burden to establish the fact. Durazo v. Ayers, 21 Ariz. 373, 188 P. 868. He who asserts the modification of a contract has the burden of proof. Taran Distributing, Inc. v. Ami,
It is evidence from what we have said that appellant had the right to rely on the terms of the legislative enactment of the Police Pension Act of 1937 as it existed at the time he entered the service of the City of Tucson and that the subsequent legislation may not be arbitrarily applied retroactively to impair the contract. Appellant's right to be retired under the Police Pension Act of 1937 existed until he evidenced an intention to be bound by or assented to the modifications provided in the amendment of 1952. The presumption would, of course, be that until appellant exercised his right of election the 1952 amendment was acceptable to him, but once having made an election both he and his widow are forever bound thereby.
We do not consider that appellant can be compelled to a choice between the 1937 act or the 1952 amendment by legislative coercion. His acquiescence in the application of the 1952 amendment during his employment is not alone sufficient to establish a waiver or an estoppel of rights under the 1937 act although he is obviously estopped from being reimbursed or from withdrawing any additional contributions above the two per cent required of the 1937 act.
Tucson has not contended in this Court that appellant consented to the modification embodied within the 1952 amendment nor has it claimed that there are facts from which a waiver or estoppel may be derived. We cannot, however, in the light of our former decisions, assume that such facts do not exist. Any statement in both Robinson and Denney, contrary to what has been here said, can no longer be regarded as law. The judgment of the court below is reversed with directions to permit appellees to amend their pleadings to set up facts to establish either a specific intention to accept the 1952 modifications on the part of appellant or waiver or estoppel from which assent can be implied. In the light of this decision, appellant may now file with the Police Pension Board and the court below his written election as to whether he will take under the benefits of the 1952 act. Otherwise judgment shall be entered in favor of appellant.
Reversed with directions.
LOCKWOOD, C.J., and BERNSTEIN and McFARLAND, JJ., concur.
I dissent from the majority opinion in this case. If I understand the argument of the majority correctly, it is that the legislature, by subsequent enactment, can modify the original pension terms only if the employee consents thereto. And if a change is favorable to him, by his silence and continuing employment he assents to the modification; if a change is unfavorable to him or subsequent events make is so, his silence and continuing employment have no effect whatsoever and he can at any time, however remote, assert that he never consented to the change and that it impairs the obligation of his "contract".
The majority opinion is based upon the erroneous premise that there was created upon employment an absolute binding "contract" to a specific pension. Notwithstanding the incorrect impression created by the language of the majority opinion, not a single jurisdiction in the thirty-five that have considered this problem support the "theory" advanced by the majority opinion save the possible exception of Georgia which is not even cited.
The basic question in this case is whether the legislature, having created a public pension system may revise the system, which revision may alter the contributions by or the ultimate benefits to public employees who have not yet retired. A careful examination of the case law reveals the following:
Many of the states follow an old common law concept that a pension is a "gratuity" which can be changed or terminated at will. See Annot., 52 A.L.R.2d 437 (1957) and A.L.R.2d Supp. Service.
Other states have adopted a "contractual" concept but have expressly held that the legislature may change the terms or modify the pension system to improve it or to keep it on a sound basis — i.e., the contractual right is not one going to the specific terms of the system as the majority opinion suggests, but rather a contractual right against unreasonable modification of the pension system. See, e.g., Allen v. City of Long Beach, 45 Cal.2d 128, 287 P.2d 765 (1955), wherein it was said:
In Kern v. City of Long Beach, 29 Cal.2d 848, 179 P.2d 799 (1947) the court said:
See also Bekenhus v. City of Seattle, 48 Wn.2d 695, 296 P.2d 536 (1956); Harvey v. Allegheny County Retirement Board, 392 Pa. 421, 141 A.2d 197 (1958); Police Pension and Relief Board of City and County of Denver v. Bills, 148 Colo. 383, 366 P.2d 581 (1961).
If the majority had actually applied the law of the "contractual" states (upon which they allegedly relied) they probably would have been compelled to find that the 1952 amendment was valid. An examination of the 1952 amendment reveals the following: The employee's contribution from his salary was increased from two to five per cent and the pension is now calculated on the basis of the average monthly salary of the last five years' earnings rather than the last year's earnings. These two changes standing alone would be a detriment to the employee. However, the 1952 amendment allows an employee to ultimately receive a pension equal to sixty per cent of his last five years' earnings by working an additional five years beyond the twenty year period. An examination of the problem will reveal that a typical employee who began work before the 1952 change and retires after twenty-five years' service rather than twenty years' service will receive, over the remainder of his life span, a pension equal to considerably more than what he would have received under the 1937 Act.
Another change in the law enacted by the 1952 amendment was the provision that gave the widow of the retired member an allowance equal to two-thirds of the monthly pension being paid to the retired member at the time of his death, whereas the Act of 1937 gave the surviving widow an allowance equal to one-third of the monthly pension being paid at the time of the member's death — or just half as much under the old law. These latter two changes more than offset the two detriments mentioned above. In addition a further provision of the 1952 amendment requires an annual audit and an actuarial study at least every three years in order to maintain the pension system on a sound basis, whereas the Act of 1937 provides neither for an annual audit not for an actuarial study. Although it is difficult to evaluate this requirement in terms of dollars and cents, it certainly cannot be said that such a requirement to insure the soundness of the pension system is not a decided benefit. I therefore feel that the disadvantages incurred by the 1952 amendment were more than offset by other provisions in the same Act representing decided advantages. The majority opinion, although allegedly relying on the "contractual" theory as expressed by California and several other states, completely
Another view taken is that the terms and conditions of public service in office or employment rest in legislative policy rather than contractual obligation, and hence may be changed except insofar as the state constitution specifically provides otherwise. Spina v. Consolidated Police, etc., Pension Fund Comm., 41 N.J. 391, 197 A.2d 169 (1964). This case also said that pension benefits are not a "gratuity" within constitutional ban against donation of public moneys and that an employee has a property interest in an existing pension fund which the state cannot simply confiscate.
The majority opinion criticizes the terms, "contingent interest" and "expectancy" in Robinson
Perhaps the most thorough analysis of this problem has been made by the New Jersey court in the Spina case. That case involved a legislative amendment requiring 25 years of service and a minimum age of 51 years, instead of the original 20 years of service and a minimum age of 50 years, for retirement of policemen and firemen on a pension. The employees contended that there was a contractual relationship. The court stated that the legislature may revise pension plans which governmental employees are required to join. The court could find no decision by the legislature in the pension statutes to part with its power of revision by thrusting a "contractual" obligation upon municipalities. The court stated:
The employees then argued that the law rejecting their position emerged from the erroneous concept that pension benefits are a "gratuity", whereas today their compensatory quality is more plainly in view. The court after stating that there is no profit in dealing in labels then met the argument that a contractual approach must be used because of a constitutional ban against gifts of public moneys.
The court then went on to show that the "contract" approach was unsound.
The court concluded:
Along this same thought it should be observed that the problem presented by this case was the very same issue presented in Robinson. At that time this Court told the legislature it had the power to revise pension systems it created. Now six years later we are telling them that they cannot change or revise the pension system they created but rather that they created absolute binding contracts with the original 1937 Act. The legislature should be able to rely with some degree of certainty upon the decisions of this Court.
In addition to the problems of the contract approach above illustrated by the Spina case, in the case at bar several other problems are raised. If Mr. Yeazell's pension is to be controlled by the strict "contract" terms of the 1937 Act, certainly he is entitled to a refund of that portion of his contribution which exceeded 2% of his salary. He would be entitled to a refund, perhaps with interest, of 3% of his contributions since 1952. If he is not estopped to claim benefits under the 1937 Act in 1962, it should logically follow that he is not estopped from claiming he paid 3% too much for ten years ending in 1962 when he retired. The majority, apparently recognizing this situation, did not want the strict contract thesis approach applied after all. The opinion makes the following unsupported statement:
No support in law or reason is given for the above statement but rather it appears as a mere expression of judicial will. Language in a recent Montana case is particularly applicable at this point. The court in State ex rel. Perry v. District Court of Fourth Judicial Dist., Mont., 400 P.2d 648 (1965) said:
Also left in a state of confusion are the rights of the other employees already retired. The action below was brought as a class action by Mr. Yeazell and all others similarly situated. The case was tried and the appeal perfected on that basis. The majority opinion completely ignored this phase of the case. Must all others similarly situated now commence an action to determine their pension status? One might also ask whether Robinson and Denney can now claim under this new decision — or are they precluded by the doctrine of res judicata?
Perhaps most serious of the problems raised by the majority opinion are the rights of widows of deceased retired employees who began their service before the 1952 amendment. If the "contract" theory is applied to them their present benefit would be cut in half. Presumably if their right to receive benefits under the terms of the 1952 Act were judicially questioned, the majority would by judicial fiat allow them also to have an "election" to pick that "contract" which is most advantageous to them. Justice Hill's dissenting language is Bekenhus v. City of Seattle, 48 Wn.2d 695, 296 P.2d 536 (1956) is apropos here when he described the absurd result a court can arrive at by this contractual approach when changes in the pension law result in both detriments and benefits (like the 1952 Arizona amendment in this case). He described it as "Heads, I win; tails, the city loses."
However, take the situation where an employee retires and "elects" to take under the 1937 Act and shortly thereafter dies. His widow according to the majority opinion would be "forever bound" by her husband's election and her widow's benefit
It is interesting to note that the appellant never raised nor argued the "strict contract theory" as applied by the majority to the case at bar. It is also interesting to observe that the legislature in their comprehensive legislation on this matter did not in any way provide for an "election" between the 1937 Act and the 1952 amendment. Correspondingly there is no provision made for the additional financial burden that will now be placed upon the fund by others similarly situated to Mr. Yeazell as a result of the majority opinion.
I would hold, as do nearly all jurisdictions having decided this issue, that the legislature can make reasonable changes as may be necessary under changing conditions to maintain the integrity and soundness of the pension system. As long as the changes are not unreasonable and arbitrary on their face, it is not a matter for further judicial inquiry.
It is submitted that the majority opinion in this case has no support in reason or logic nor the case law (not even the cases allegedly relied upon) and will create problems far beyond the immediate controversy.
For these reasons I dissent from the majority opinion and would affirm the judgment of the trial court.
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