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Hebert v. City of Woonsocket

Supreme Court of Rhode Island

July 2, 2019

Glen Hebert et al.
v.
The City of Woonsocket, by and through its Mayor, Lisa Baldelli-Hunt, et al.

          Providence County Superior Court (PC 13-3287). Jeffrey A. Lanphear Associate Justice.

          For Plaintiffs: Edward C. Roy, Jr., Esq.

          For Defendants: Sara A. Rapport, Esq. Michael J. Marcello, Esq. Matthew H. Parker, Esq. Timothy K. Baldwin, Esq. John DeSimone, Esq.

          Present: Suttell, C.J., Goldberg, Flaherty, Robinson, and Indeglia, JJ.

          OPINION

          FRANCIS X. FLAHERTY ASSOCIATE JUSTICE.

         The defendants, the City of Woonsocket and the Woonsocket Budget Commission (the WBC) (collectively, the City), appeal from a decision and judgment of the Superior Court that granted a preliminary injunction in favor of the plaintiffs, a number of retired Woonsocket police officers. The trial court restrained the City from changing the terms of the plaintiffs' retiree health insurance. On appeal, the City argues that the trial justice erred by finding the following: (1) that the plaintiffs had a vested contractual right to free lifetime health benefits for themselves and their beneficiaries; (2) that the WBC was not empowered with the statutory authority to make changes to the plaintiffs' health care benefits; (3) that the WBC violated the Contract Clause of the Rhode Island Constitution when it required the plaintiffs to pay for their health insurance under a new uniform health care plan applicable to all retirees and employees; and (4) that the plaintiffs established that they suffered irreparable harm. For the reasons set forth in this opinion, we vacate the judgment of the Superior Court.

         I Facts and Travel

         The essential facts of this case, which are largely undisputed, are as follows. Within the past two decades, the City of Woonsocket has fallen on hard times. The City has been designated as one of Rhode Island's seven "distressed communities," defined as those having the "highest property tax burdens relative to the wealth of taxpayers." General Laws 1956 § 45-13-12. In fact, as of 2012, 19.9 percent of its families lived in poverty, compared with the state average of 9.7 percent; the median household income was $34, 518, compared with the state average of $54, 900; 72 percent of its students were eligible for a subsidized lunch, compared to just 46 percent for the state average; and 64.9 percent of its students graduated from high school in four years, compared with the state average of 77.1 percent. Moreover, from 2000 to 2010, the City's population declined by 4.7 percent, a time during which the state's population increased by 0.7 percent. The trend was equally distressing in foreclosure rates: in 2009 alone, the City's foreclosure rate was 3.6 percent, more than double the state's rate of 1.54 percent. Ominously, major retailers such as Walmart, Lowe's, and Staples had all left the City.

         The City's fiscal woes, perhaps hidden from view, began years earlier, however, when it was confronted with unfunded pension obligations. In 2002, the City faced a pension liability of $81, 203, 910, but it had only $2, 172, 718 in assets, or a dangerous 2.68 percent of full funding. In response to the pension woes of Woonsocket and several other communities, the General Assembly enacted legislation-Public Laws 2002, ch. 10-that authorized the City to issue up to $90 million in pension bonds, to be amortized over a thirty year period. See P.L. 2002, ch. 10, § 1. The law required, however, that if the City's pension plan then fell below 100 percent funding, the City was required to eliminate that shortfall within five years and return the funding to 100 percent. See id. at § 8.

         The bonds that were sold under authority of the legislation replenished the City's pension back to 100 percent funding, but when the Great Recession struck, the pension fund value again declined.[1] In the five year period from July 1, 2007, through July 1, 2012, the fund's assets dropped from $90, 034, 746 to $55, 902, 219, which caused the assets-to-liabilities ratio to fall below 60 percent and required immediate action under state law.[2]

         In fiscal year 2008, the City was able to contribute only $32, 100 of the $2, 470, 633 that was required by the law; in fiscal year 2010, only $15, 612 of the required $7, 643, 873; and in fiscal year 2012, only $1, 006, 677 of the required $10, 545, 371.

         That was not the only source of fiscal bad news for Woonsocket. The Great Recession also caused the state to impose budget cuts in municipal aid, which had a direct and disastrous impact on the City's finances. Between 2007 and 2011, the state decreased the City's general revenue sharing and state aid by a staggering $13, 164, 929, or 22.3 percent. Indeed, in total, the City lost $54, 467, 452 in state aid from 2007 to 2013. Further, the Woonsocket Education Department was receiving fewer state education funds than it had received in fiscal year 2007, even though the state had initiated a gradual phase-in of increased educational funding in 2012.[3]As a result of the decreased funding, the City's budget deficit increased from $197, 178 for fiscal year 2008 to $12, 247, 266 for fiscal year 2010.

         The record reveals that the City took drastic measures to address its undeniable fiscal crisis. It increased taxes to the maximum permitted under state law and exceeded that maximum by taxing at or above the statutory 4 percent levy cap for most years between 2008 to 2012; it also had the highest average increase in property tax levies over this period among any of the City's comparable benchmark communities, at 6.44 percent.[4] Moreover, the City imposed a trash collection fee in an effort to generate approximately $1 million annually in revenue, and negotiated payments in lieu of taxes with certain local property owners to generate an additional $3.2 million annually.

         On the expenditure side of its budget, the City also attempted to reduce its obligations by closing a school, turning off street lights, and abandoning all projects to rebuild its infrastructure and replace equipment except those that required emergency repairs. It also cut back on its contributions to the pension fund, the consequences of which were exacerbated by the reduction in state aid as well as the decline in pension investment income caused by a battered stock market. Even with these actions, however, drastic by any measure, the City continued to experience a budget deficit of roughly $2.5 million.

         The struggling City sought and received concessions from many of the collective bargaining units that represented its employees. The police union agreed to reduce staff and lower its expected wage increase. Additionally, it agreed that new hires would be required to make copayments on their health insurance and, for the first time, that new hires would contribute a 20 percent copayment on health insurance premiums after retirement.

         The firefighters union similarly agreed to reduce minimum staffing, implement a twenty-four hour shift, revamp its health care plan design, and use civilians for dispatch services in lieu of firefighters. Those measures with the firefighters union saved over $3.5 million for the City over its three year contract period. That, however, did not end the City's efforts. Woonsocket laid off eleven firefighters in 2009 and was forced to briefly "brownout" a ladder truck in 2010.

         Finally, the Woonsocket Education Department unions, which already had made concessions to reduce the City's health care coverage contributions for teachers, paraprofessionals, and other nonteaching personnel, also agreed that their members would make 10 to 20 percent co-share contributions to health insurance costs under a deductible plan similar to a plan that had been accepted by the firefighters union. The teachers also did not receive a salary increase for four years and they gave up altogether a deferred payment that had previously been negotiated for in lieu of a salary increase. Other municipal unions agreed to contribute to health care costs, suspend wage increases for an additional two years, and eliminate positions.

         The record reveals that those concessions, as far reaching as they were, did not eliminate the budget deficit and, in April 2010, Moody's Investor Services downgraded the City's bond rating to non-investment-grade Ba1, or what is more commonly referred to as "junk bond status." In an effort to further reduce the deficit, the City, in July 2010, issued $11.5 million in deficit reduction bonds, obligating itself to very high interest rates as a result of its poor bond rating. Although that bond issuance may have resulted in an improved cash flow, it also carried the natural consequence of increasing the City's cumulative debt load to a staggering total of $192, 815, 937 in fiscal year 2012. At that time, the City's debt ratio was 14.24 percent of equalized weighted assessed valuations. That was by far the highest in the state; the state average was only 1.47 percent.

         Adding fuel to an already blazing fire, in fiscal year 2010, the Woonsocket Education Department experienced a $3 million deficit. By June 2012, that deficit had increased to nearly $9.78 million, leaving the City with a cumulative unassigned fund deficit of $7.146 million. The City sought authorization from the General Assembly to impose up to $6.6 million in a supplemental tax, but that proposal was not passed by the legislature. Payroll checks began to be dishonored, and the City's school committee contemplated ending the school year early because it was simply running out of money.

         By the end of fiscal year 2012, the City was responsible for bills surpassing $10.2 million in total, nearly $4 million of which was more than ninety days overdue. At the same time, the City pension fund for retired police officers and firefighters who were not members of the Municipal Employees Retirement System (MERS) fell into "critical status" as defined by the Retirement Security Act, G.L. 1956 chapter 65 of title 45, which required the City to enact a plan that would enable it to emerge from that status within twenty years. This burden was in addition to the already existing requirement that the City comply with the previously enacted legislation allowing it to borrow $90 million so that it could replenish the pension fund to full funding within five years. To comply with both of those state laws, the City needed to make an annual pension fund contribution of $11, 615, 000 for each fiscal year from 2013 to 2017. As former Mayor Leo Fontaine elaborated, the situation had turned into a "perfect storm of problems" that the City could not survive without assistance. By that point in time, it is no exaggeration to conclude that the City was in a fiscal death spiral.

         In May 2012, the City requested, and the Director of the Rhode Island Department of Revenue appointed, a budget commission, the WBC, under the Fiscal Stability Act, G.L. 1956 chapter 9 of title 45 (the FSA). The WBC determined that, if the City maintained its status quo, it would face a cumulative budget deficit of $105.5 million by the end of fiscal year 2017. The WBC requested and received advancements in state aid that totaled $3, 148, 621 into June 2012, $12, 422, 538 into July 2012, and another $12, 799, 650 into July 2013, to allocate to the City's education department. It then tried without success to obtain authorization to impose another supplemental tax, and it worked with vendors to prevent a termination of services, including health insurance.

         In accordance with the FSA, the WBC developed a five year plan. The WBC's five year plan first increased revenues in the City in three ways: (1) the General Assembly approved a maximum $2.5 million supplemental property tax for fiscal year 2013; (2) there was a 4 percent levy increase for fiscal year 2014; and (3) the City reduced the homestead exemption for single-family/condominium owner-occupied homes, two-family homes, and three-family homes. Those measures increased the property tax bill for owners of single-family/condominium owner-occupied homes by 22.9 percent in one year. As a result, the City had the highest residential and commercial tax rates among the eight benchmark communities, as well as the highest effective tax rate and the highest median family income tax rate. Additionally, it also had the second highest per capita income adjusted tax rate and the second highest owner-occupied single-family residential effective tax rate among the eight benchmark communities.

         Next, the WBC reduced staffing and reorganized municipal departments. The City represents that, in fiscal year 2014, the City maintained a complement of eighty-six police officers, far below the prior contractual mandate of 101. That single change saved $1, 124, 756 in fiscal year 2014. Likewise, for fiscal years 2015 through 2018, the City indicates that it reduced the staff of the fire department to 110 employees, below the then contractual mandate of 117, thereby reducing expenditures by $400, 000 to $500, 000 annually. The City also replaced firefighters who had been serving as dispatchers with lesser paid municipal employees, resulting in an annual savings of over $1 million in fiscal years 2016, 2017, and 2018.

         The five year plan also reformed the City's health benefit plans, which accounted for approximately 13 percent of the City's overall budget in fiscal year 2012. Before the five year plan went into effect, the City had administered nineteen different health care plans for employees and retirees, which contained a wide range of benefits and employee contributions. As part of the five year plan, the WBC chose a single uniform plan for all city employees and retirees (the Uniform Plan). The Uniform Plan required point of delivery charges for certain services and prescription drugs, also known as "co-pays," and payment of a deductible for other services, up to an annual maximum of $500 under an individual plan and $1, 000 for a family plan. According to the City, the Uniform Plan provided the same or better access to a national network of health care providers than had been provided previously.

         From September 2012 through November 2013, the WBC negotiated and secured concessions, including health care concessions, from all seven of the City's bargaining units.[5]From that point forward, all employees were required to contribute to the cost of their health care coverage by making a monthly co-share payment. The City saved, from employee health care reform alone, $1, 149, 172 for fiscal year 2014; $1, 369, 294 for fiscal year 2015; $1, 538, 464 for fiscal year 2016; and $1, 707, 332 for fiscal year 2017.

         The WBC then went one step further and modified the health care coverage of the retirees. The plaintiffs are former Woonsocket police officers who retired before the WBC was appointed. While they were working, plaintiffs had been represented by the International Brotherhood of Police Officers Local 404 (the union), which negotiated salaries and retirement benefits on their behalf. Over the years, the City and the union had entered into numerous collective bargaining agreements, but the last collective bargaining agreement that had been agreed upon between the City and the union before the WBC was appointed was in effect from July 1, 2002, through June 30, 2005 (the 2002-2005 CBA). Significantly, the 2002-2005 CBA provided the following:

"4.2 The City shall pay the entire cost of Major medical, plus student rider coverage, and $2 Co-Pay Drug Program, for all members of the IBPO Local 404 on active service in City employment and including those members placed on disability or retirement pension after July 1, 1981.
"* * *
"4.5 The City shall pay the entire cost, including family coverage, applicable where an employee has a family within Blue Cross definition, for an employee, covered by this Agreement, placed on disability or retirement pension list after July 1, 1981 and the semi-private plan of the Rhode Island Hospital Service Corporation (Blue Cross) and also the Rhode Island Medical Society Physicians, Service Plan 100 in accordance with the rules and regulations of such corporation. The City shall pay the cost of Major Medical for said retirees. Said coverage may be temporarily suspended by the City in avoidance of dual coverage if equal or greater benefits are provided through any other means to said retiree." (Emphasis added.)

         From the expiration of the 2002-2005 CBA until 2010, the relevant portions of the 2002-2005 CBA were incorporated by binding interest arbitration awards pursuant to the Municipal Police Arbitration Act, G.L. 1956 chapter 9.2 of title 28.[6] In 2010, the union and the City came to a tentative agreement whereby, effective August 15, 2010, any police officer hired after that date would be required to contribute to the cost of his or her health insurance. The tentative agreement also provided that, when police officers who are hired after August 15, 2010 retire, they would continue to be required to contribute to their health insurance costs. The tentative agreement was ratified by the Woonsocket City Council in September 2010 and expired on June 30, 2012.

         On March 19, 2013, the WBC adopted a resolution, which stated, in pertinent part:

"Absent agreement to the contrary between the Budget Commission and retiree representatives, all health insurance benefits currently provided to retirees of the City * * * and their beneficiaries, who are not yet eligible or who are ineligible for Medicare benefits shall change, effective July 1, 2013, to [the Uniform Plan] for all City employees and retirees and their beneficiaries, other than those eligible for Medicare, and the City shall cover eighty percent (80%) of the cost, and the retiree, twenty (20%) of the cost of such [Uniform Plan] * * *."

         That resolution was amended in June 2013. The amendment afforded all retirees the option to join an alternative health care plan with a reduced co-share (10 percent) but a higher deductible ($2, 000 for the individual plan, $4, 000 for the family plan) than the Uniform Plan (the Alternative Plan). The resolution was amended again in July 2013 and December 2014 to give effect to negotiated agreements with fire and police retirees.[7] Those resolutions reduced the co-share requirements of the Uniform Plan and Alternative Plan from 20 and 10 percent, respectively, to zero percent by fiscal year 2018. In other words, effective July 1, 2017, and thereafter, no police or fire retiree, including plaintiffs, would be required to make any co-share contribution. Through these changes alone, the City saved $2.3 million in fiscal year 2014. Approximately half of those savings came from changes to the police retirees' health care coverage.

         Additionally, the WBC, in the Retiree Resolutions, suspended all cost of living adjustments (COLAs) on pension benefits provided to the police and fire retirees and their beneficiaries who were participants in the City's pension plan.[8] The suspension of COLA benefits, effective July 1, 2013, was projected to save the City $1, 515, 000 annually for fiscal years 2014 through 2017. The WBC also secured an amendment to the 2002 pension bond enactment that allowed for a period of an additional twenty years for amortization if the pension plan fell below full funding. That action saved the City $5, 504, 000 each fiscal year from 2014 to 2017. Together, the actions on pension reform lowered the City's projected annual required contribution to $3, 465, 000 for fiscal years 2014 through 2017, from its previous projected contribution for that time period of $11, 615, 000.[9]

         In total, the five year plan generated an average of approximately $13 million in annual savings for the City from fiscal year 2014 through fiscal year 2017 and, if substance followed form, it was anticipated that the City's cumulative operating deficit would be eliminated by fiscal year 2017. Furthermore, the five year plan assumed that the City would continue to make contributions of more than $3.6 million in fiscal years 2014 through 2017 to pay its other post-employment benefits (OPEB). As of July 1, 2013, the City's unfunded OPEB liability had been $224, 446, 589, the most of any municipality in the state. By following the five year plan, however, the City would be able to reduce that deficit to $117, 549, 866.

         It is the City's position that the $2.3 million savings from altering the retiree health care benefit plans was necessary, and removing it from the five year plan would have "risked disruption of the delicate balance, and the collapse of the comprehensive effort." It cites for support the trial testimony of the Director of the Rhode Island Department of Revenue, Rosemary Booth Gallogly, who testified at trial as an expert in municipal finance and said that she did not believe there was any other way for the City to have saved $2.3 million other than by altering plaintiffs' health insurance plans.[10]

         On July 2, 2013, the day after the City implemented the new health insurance plans for the retirees, plaintiffs filed their complaint in Superior Court, seeking injunctive and declaratory relief. The plaintiffs claimed that the City had contractually promised to pay the entire cost of their health care coverage in accordance with the CBAs that were in effect at the time of their retirement. Preliminary injunction hearings commenced soon thereafter, which entailed ten days of testimony over diverse dates from August 2013 through February 2014. The parties conducted discovery and submitted more than one hundred exhibits and affidavits.

         The trial justice heard testimony from Mayor Fontaine, former school committee and city council member John Ward, and Director Gallogly, all of whom testified as to the narrative above. Additionally, six plaintiffs-retired police officers Glen Hebert, Scott Strickland, Ronald Tetreau, Daniel Turgeon, Steven Nowak, and Earl Ledoux-testified at the preliminary injunction hearing that they had retired before the WBC had been appointed and, importantly, with the firm understanding that they would, under the terms of the CBAs in effect at the time of their respective retirements, receive free health care for the rest of their lives. Mr. Strickland testified that he could not afford to pay the increased costs of the new health care plan, and Mr. Ledoux said that, with the new health care plan in place, his health care costs had increased by approximately $7, 000 per year because he and his children were having personal health issues.

         In July 2015, approximately one and one-half years after the last preliminary injunction hearing date, and while the decision on the preliminary injunction was still pending, plaintiffs moved to restrain the termination of their health care benefits. The plaintiffs claimed that the City threatened to terminate plaintiffs' health care benefits because they had not paid any co-share contributions. The trial justice ordered that only those plaintiffs who were receiving disability pensions or those who were earning less than 300 percent of the federal poverty level would be absolved from paying any co-shares or deductibles until a final decision was issued. According to the City, seven plaintiffs fell under this classification and were thus exempt from paying their health care insurance.

         Approximately two years after the preliminary injunction hearings, in February 2016, the trial justice rendered a decision in this difficult case, and granted plaintiffs' motion for a preliminary injunction.[11] He found that the City and plaintiffs entered into multiple contracts in which the City promised to pay for all of plaintiffs' health insurance and that of their dependents. According to the trial justice, many police officers, including those who testified, "retired based on the contracts' assurances of continued coverage." He determined that the City was not vested with the statutory authority under the FSA to alter plaintiffs' health care benefits. He further found that the City had violated the Contract Clause of the Rhode Island Constitution.[12]Specifically, the trial justice held that the City's alterations to the health insurance benefits provisions constituted a substantial impairment to plaintiffs' existing contracts. Although the trial justice found that the City had demonstrated that it was in a precarious financial condition when the contractual promises were modified, he also held that "the situation was not necessarily dire" because "[t]he City could not demonstrate that it was on the verge of bankruptcy" and "[a] receiver had not been appointed." The court reasoned that "[t]he deprivations to the retirees were too broad and too deep to render them of a character appropriate to the public purpose." As a result, the trial justice determined that plaintiffs had successfully proven a likelihood of success on the merits of their Contract Clause claim.

         The trial justice further found that injunctive relief was necessary to prevent irreparable harm to plaintiffs because they had "demonstrated that their access to necessary health care [was] threatened by Defendants' modification of their health care benefits[.]" He also held that the equities favored plaintiffs because the City had participated in the creation of its own fiscal disaster, had failed to take timely measures to improve its finances, and now wished to make permanent changes to plaintiffs' existing contracts without the benefit of negotiation. Finally, the trial justice found that preserving the status quo would necessitate granting the preliminary injunction and requiring the City to pay for plaintiffs' health care benefits. He thus reinstated the postretirement health care benefits as they had been enumerated in the 2002-2005 CBA.[13] The City filed a timely notice of appeal.[14]

         II Standard of Review

         "This Court will reverse the decision of a trial justice to grant or deny a permanent injunction only when it can be shown that the trial justice misapplied the law, misconceived or overlooked material evidence or made factual findings that were clearly wrong." Pelletier v. Laureanno, 46 A.3d 28, 35 (R.I. 2012) (quoting Hilley v. Lawrence, 972 A.2d 643, 648 (R.I. 2009)). "This Court's review of the factual findings of a trial justice sitting without a jury is deferential." Id. (quoting Hilley, 972 A.2d at 648). "We likewise accord great deference to the trial justice's 'resolution of mixed questions of law and fact, as well as the inferences and conclusions drawn from the testimony and evidence' in a nonjury case." Id. ...


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