Sixth Circuit Upholds City's Retiree Health Cuts

In a decision dated September 1, 2017, the United States Court of Appeals for the Sixth Circuit issued a decision making it much easier for Michigan municipal entities to reduce or eliminate retiree health obligations. In Serafino v. City of Hamtramck, Sixth Circuit Case No. 16-2370 (9/1/17), the Court upheld the District Court decision finding that the City of Hamtramck, Michigan could lawfully modify retiree health care benefits for a retired group of police officers and fire fighters because the contracts under which the plaintiffs retired did NOT specifically state that the benefits were "vested for life."

The City of Hamtramck was one of several Michigan municipalities which hovered on bankruptcy after what the Sixth Circuit described as the "Great Recession." As a result, a temporary emergency manager was appointed by the Governor under State law to oversee the finances of the City. The emergency manager proposed various budgetary changes to prevent the City from becoming insolvent. Originally, the retirees of the City had health care plans with no deductibles and very low co-pays. To save costs, the City had previously gone to high-deductible plans with health savings accounts. However, the City reimbursed the retirees for the full amount of the deductible ($2,000/single and $4,000/family).

Effective January 29, 2014, the emergency manager implemented a change in the plan whereby the retiree was responsible for the entire deductible. The retirees objected to the change and filed a class action suit in federal District Court alleging various violations of the United States Constitution and breach of contract under Michigan law. The District Court dismissed the plaintiffs' breach of contract claim because it found that the relevant union contracts did not create a "vested right" to lifetime health care benefits. Because each of plaintiffs' constitutional claims required some property interest, the District Court noted that the dismissal of the breach of contract claim resulted in the failure of all of the plaintiffs' constitutional claims as well. The plaintiffs appealed to the Sixth Circuit Court of Appeals.

The Sixth Circuit began its analysis by noting that it had previously analyzed such claims with a "thumb on the scale" in favor of the employees. However, the Court observed that this favoritism was no longer permissible after the United States Supreme Court's 2015 decision in M&G Polymers v. Tackett. In Tackett, the Supreme Court ruled that ordinary rules of contract interpretation should apply to collective bargaining agreements and that the courts "should not interpret ambiguous writings to create lifetime promises."

In interpreting the contracts at issue, the Sixth Circuit noted that all the contracts had general durational clauses stating that the contracts began and ended on specific dates. The Court found nothing in any of the contracts that excluded the retirees' health benefits from this general duration clause. Thus, the Court found that the retirees' rights did not vest.

Importantly, the Court went beyond merely holding that the emergency manager had the right to impose the cost of the deductibles on the retirees; the Court also implied that the City could have gone as far as eliminating the retiree benefits completely. The Court stated:

"All of the CBAs at issue in this appeal contain unambiguous general-durational clauses that defeat plaintiffs' argument that they have vested, lifetime rights to healthcare benefits. Looking to the four corners of the agreements, there is no indication that the City intended to provide any healthcare benefit to the retirees for life, let alone a right to deductible-free, low-co-pay, forever-unalterable healthcare insurance" (emphasis in the original).

In January 2017, Michigan Governor Rick Snyder created a task force focused on addressing unfunded pension and retiree health liabilities of Michigan local governments. The task force's "Findings and Recommendations for Action" report describes the state of the problem: total liability for Michigan local government's unfunded retiree healthcare benefits is estimated at $10.13 billion and growing. This decision will no doubt cause many municipalities in Michigan to analyze their budgets and the potential for reductions in their retiree health benefits.

If you have any questions about the decision or how to proceed in this evolving area of the law, please contact Steve Girard or another member of Clark Hill's Labor and Employment practice group.