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Dannenberg v. State

Supreme Court of Hawaii

October 21, 2016

JAMES DANNENBERG, BILLY SOUTHWOOD, VALERIE YAMADA SOUTHWOOD, DUANE PREBLE, and SARAH PREBLE, individually and on behalf of all others similarly situated, Respondents/Plaintiffs-Appellants/Cross-Appellees,
v.
STATE OF HAWAI'I, HAWAI'I EMPLOYER-UNION HEALTH TRUST FUND, BOARD OF TRUSTEES OF THE HAWAI'I EMPLOYER-UNION HEALTH BENEFITS TRUST FUND, Petitioners/Defendants-Appellees/Cross-Appellants, and COUNTY OF KAUA'I, CITY AND COUNTY OF HONOLULU, COUNTY OF MAUI, COUNTY OF HAWAI'I, Respondents/Defendants-Appellees.

         APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CAAP-15-0000084; CIV. NO. 06-1-1141)

          Deirdre Marie-Iha and Donna H. Kalama for petitioners

          Paul Alston Maren L. Calvert John Rhee and Charles K.Y. Khim for respondents

          Mauna Kea Trask and Adam P. Roversi for respondent County of Kaua'i

          Donna Y.L. Leong and John S. Mukai for respondent City and County of Honolulu Patrick K. Wong and Richard B. Rost for respondent County of Maui

          Molly A. Stebbins Melody Parker and Laureen L. Martin for respondent County of Hawai'i

          INTERMEDIATE COURT OF APPEALS ASSOCIATE JUDGE LEONARD, ACTING C.J., CIRCUIT COURT JUDGES HARA, CAHILL, KURIYAMA, AND CRABTREE IN PLACE OF NAKAYAMA, MCKENNA, POLLACK, AND WILSON, JJ., RECUSED, AND CIRCUIT COURT JUDGE ALM, RECUSED, PREVIOUSLY ASSIGNED IN PLACE OF RECKTENWALD, C.J., RECUSED

          OPINION OF THE COURT

          LEONARD, ACTING C.J.

         This class action suit concerns the health benefits provided by the State of Hawai'i, the City and County of Honolulu, and the Counties of Kaua'i, Maui, and Hawai'i, to the following class members:

All employees (and their dependent-beneficiaries) who began working for the Territory of Hawai'i, the State of Hawai'i or the political subdivisions thereof, before July 1, 2003, and who have accrued or will accrue a right to post-retirement health benefits as a retiree or dependent-beneficiary of such a retiree. This includes: (a) those who have not yet received any post-retirement health benefits from Defendants as a retiree or dependent beneficiary of such a retiree; and (b) those who have received any post-retirement health benefits from Defendants since July 1, 2003 as a retiree or dependent-beneficiary of such a retiree. For purposes of damages only, if any, the class shall also include the estates and heirs of any deceased retiree or deceased dependent-beneficiary of a retiree who is or was a member of the class. [1]

         As the parties submit, the central issue in this case is whether the State and Counties have impaired the appellants' accrued retirement health benefits in violation of article XVI, section 2 of the Hawai'i Constitution, which provides:

Membership in any employees' retirement system of the State or any political subdivision thereof shall be a contractual relationship, the accrued benefits of which shall not be diminished or impaired.

         Individually and on behalf of all others similarly situated, Plaintiffs-Appellants/Cross-Appellees James Dannenberg, Billy Southwood, Valerie Yamada Southwood, Duane Preble, and Sarah Preble (Appellants) appeal, and Defendants-Appellees/Cross- Appellants State of Hawai'i, the Employer-Union Health Benefits Trust Fund (EUTF), and the Board of Trustees of the EUTF (EUTF Board) (together, the State)[2] cross-appeal, from the January 30, 2015 Final Judgment (Judgment), filed in the Circuit Court of the First Circuit (Circuit Court), [3] as well as challenge, in whole or in part, the Circuit Court's: (1) October 16, 2014 Order Denying Plaintiffs' Motion for Partial Summary Judgment and Order Granting State Defendants' Motion for Partial Summary Judgment (Summary Judgment Order); and (2) December 16, 2014 Order Denying Plaintiffs' Motion for Reconsideration or, in the Alternative, Leave to Pursue an Immediate Interlocutory Appeal of the Summary Judgment Order (Order Denying Reconsideration).

         We hold, inter alia, that: (1) pursuant to article XVI, section 2 of the Hawai'i Constitution, benefits arising from membership in the Hawai'i employees' retirement system (ERS), including retiree health benefits, accrue upon an employee's enrollment in the ERS, subject to any conditions precedent in place at the time of enrollment that must be satisfied before receiving the benefits; (2) notwithstanding a repealed statutory provision that required "substantial equality of benefits" to all State and County "Employees" who were entitled to receive them, article XVI, section 2 of the Hawai'i Constitution protects accrued retiree health benefits, not parity of health benefits between active employees and retirees; (3) the starting place for a determination of Appellants' accrued retirement health benefits is the retirement health benefits that were promised to Appellants at the time of their enrollment in the ERS, as these are the benefits that, in the first instance, arise from their membership in the ERS; (4) Appellants' constitutionally protected retirement health benefits are not an exact package of health benefits, fixed as of a certain date, unchanged and unchangeable over time, and such benefits remain subject to legislative changes, so long as those changes do not result in a diminishment or impairment of the benefits that have been accrued; and (5) there are genuine issues of material fact as to whether Appellants' accrued retirement health benefits have been diminished or impaired in violation of article XVI, section 2.

         I. LEGISLATIVE BACKGROUND

         In 1961, the Hawai'i Legislature passed Act 146, which created the Hawai'i Public Employees Health Fund (Health Fund or PEHF) as a vehicle to provide active and retired government employees and their dependents with a health benefits plan. 1961 Haw. Sess. Laws Act 146. The Health Fund Act established a Board of Trustees to administer and carry out the purpose of the Health Fund. Revised Laws of Hawaii (RLH) § 5A-12 (Supp. 1961); 1961 Haw. Sess. Laws Act 146, § 1(13) at 194. The Board's duties included determining the health services to be provided by health benefit plans, entering into contracts for health benefit plans, selecting the carrier to provide indemnity-type health benefit plans, and establishing eligibility requirements for employees and their dependents. RLH §§ 5A-13 to -15 (Supp. 1961); 1961 Haw. Sess. Laws Act 146, § 1 (13)-(15) at 194.

         The Health Fund was terminated with the repeal of Hawaii Revised Statutes (HRS) Chapter 87, effective June 30, 2003. 2001 Haw. Sess. Laws Act 88, §§ 1-10 at 138-52. The Health Fund was replaced with the EUTF, through the passage of Act 88, which is now codified as HRS Chapter 87A. In enacting Act 88, the Legislative Conference Committee stated:

If nothing is done now, the spiraling cost of the Health Fund will create significant financial hardships for state taxpayers. Recognizing the urgency of this matter, your Committee on Conference finds that reforming the Health Fund is the responsible thing to do.
This bill will ensure that the Health Fund, and the succeeding Trust Fund, will remain solvent. Consolidating the health benefits programs under the existing system will ensure the solvency of the State, as well as benefit all public employees and retirees today and in the future.
It is not the intention of your Committee on Conference that public employees and retirees suffer a diminishment of existing health benefits. This bill will give the governing boards of the Trust Fund and the Health Fund, during the transition period, complete discretion, authority, and flexibility to devise and maximize the levels and types of benefits available for public employees and retirees.

Conf. Comm. Rep. No. 124, in 2001 House Journal, at 1098 (emphasis added). To this purpose, the EUTF was to take charge of the various health benefits programs and "establish a single health benefits delivery system for State and county employees, retirees, and their dependents." Id. at 1097.

         Some of the issues raised in this case concern the language and applicability of the now-repealed HRS Chapter 87. With the enactment of Chapter 87, more specifically HRS § 87-22(b), the Legislature authorized the Health Fund Board to determine the health services offered in a health benefits plan and to contract for a health benefits plan "provided that benefits under any respective plan shall be equally available to all employees and their dependents selecting such plan regardless of age[.]" 1961 Haw. Sess. Laws Act 146, § 1(13) at 194. Members of the House Finance Committee had expressed concern that "[h]ealth benefits under the federal medicare program for the aged may be inferior to health benefits under the state health benefits plans and retirees or old employees should not be discriminated against, but should have the plan offering the better benefits." Stand. Comm. Rep. No. 978, in 1961 House Journal, at 1048. The Finance Committee amended a previous draft of the bill, adding the section 87-22(b) clause, in part to "prevent possible discrimination regarding the availability of benefits against older persons." Id. From the Health Fund's inception in 1961 until 2001, HRS § 87-22(b) maintained this language, with some minor amendments. HRS § 87-22(b) (Supp. 2000), repealed by 2001 Haw. Sess. Laws Act 88, § 3 at 50.[4] In addition, however, from its inception, the Health Fund Act also provided that the meaning of the term "employee" included "a retired member of the employees' retirement system, the county pension system or the police, firemen or bandsmen pension systems. . ., " thus equating active employees and retirees for the purpose of the Act. See 1961 Haw. Sess. Laws Act 146, § 1(1)(e)(9) at 192.

         In 2001, the Legislature amended HRS § 87-22(b), removing the language that "benefits . . . shall be equally available to all employee-beneficiaries and dependent-beneficiaries selecting the plan regardless of age[.]" HRS § 87-22(b) (Supp. 2001) (repealed). This amendment to HRS § 87-22(b) was effective from July 1, 2001, until July 1, 2003, when Chapter 87 was repealed and replaced with Chapter 87A, and the Health Fund was replaced with the EUTF. 2001 Haw. Sess. Laws Act 88, §§ 3-10 at 150-52.

         The EUTF is administered by the EUTF Board, which is charged with procuring health benefit plans for employees (and their dependents), including retirees. HRS § 87A-5 (2012); see also Conf. Comm. Rep. No. 124, in 2001 House Journal at 1098. The EUTF Board has awarded contracts for various health plans including, inter alia, a "new" Hawaii Medical Service Association (HMSA) Preferred Provider medical plan, a Kaiser Health Maintenance Organization (Kaiser) medical and prescription drug plan, a Vision Service Plan (VSP), and a Hawaii Dental Service (HDS) plan. Although HRS Chapter 87A includes retirees within its definition of employees, it does not include language requiring benefits to be equally available to all employees. See HRS §§ 87A-1 & 87A-23 (2012).

         According to Appellants' health benefits expert, Paul A. Tom, in 2001 and 2002, retirees received the same health benefits, including the same coverage, deductibles, maximums, and co-pays, as active employees under the Health Fund; however, since July 1, 2003, the benefits for retirees and active employees in HMSA plans changed in the form of coverage, deductibles, maximums, and co-pays.[5]

         II. PROCEDURAL HISTORY

         A. The Class Action Suit

         On June 30, 2006, Appellants (retired state employees) Marion Everson, [6] James Dannenberg, Billy Southwood, Valerie Yamada Southwood, Duane Preble, and Sarah Preble, individually and on behalf of others similarly situated, filed a Complaint for Declaratory Relief, Injunctive Relief, and Damages, claiming that the State and Counties violated their statutory rights under HRS Chapter 87 and/or 87A by not providing retirees and their dependents with dental and medical benefits that were substantially equal to those provided to active workers and their dependents. On August 9, 2006, the State filed a motion to dismiss claiming, inter alia, that primary jurisdiction over Appellants' claims resided with the EUTF Board. On August 16, 2006, the Counties also filed a motion to dismiss and joined in the State's motion to dismiss.

         On November 13, 2006, Appellants filed a First Amended Complaint in the Circuit Court, reasserting the claims of the original complaint, and adding a claim of negligence and a claim of violation of article XVI, section 2 of the Hawai'i Constitution.

         After a December 15, 2006 hearing, on June 26 and 29, 2007, the Circuit Court granted in part the defendants' motions to dismiss, on the grounds that the plaintiffs' claims "require the resolution of issues that have been placed within the special competence of the EUTF . . . [and] the EUTF board of trustees is charged with administering and carrying out the purposes of the [EUTF] including the provision of health benefits plans under HRS Sections 87A-15 and 87A-31[.]" Thus, the court concluded that the EUTF had primary jurisdiction over the plaintiffs' claims.[7] The Circuit Court ordered a stay of all proceedings pending resolution of the issues involved in the referral of the plaintiffs' claims to the EUTF, and otherwise held in abeyance any further ruling on the defendants' requests for dismissal of the action.

         B. The Agency Action

         In a May 15, 2007 petition for declaratory relief to the EUTF Board, and a June 15, 2007 amendment to the petition (collectively, the EUTF Petition), Appellants sought a declaratory ruling as to the following four questions:

A. Is the EUTF permitted, notwithstanding Article XVI, Section 2 of the Hawai'i Constitution and the requirements of HRS Chapter 87A, to provide health care benefits to State and County retirees and their dependents which are inferior to the health care benefits provided to active State and County workers and their dependents?
B. If your answer to question A is "yes, " what is the minimal array of the health care benefits that must be provided to retirees and their dependents?
C. Did the EUTF health benefits plans in effect from July 1, 2003 to the present comply with the requirements of the Hawai'i Constitution and HRS Chapter 87A?
D. If your answer to Question C is "no, " are retirees and/or their dependents entitled to either monetary compensation/damages or any other form of relief (legal or equitable)? If so, how is it to be calculated and for what period of time?

See Everson v. State, 122 Hawai'i 402, 405, 228 P.3d 282, 285 (2010).

         On September 7, 2007, after briefings, evidentiary submissions, other filings, and an August 3, 2007 hearing, the EUTF Board issued its Findings of Fact, Conclusions of Law, and Order, concluding, inter alia, that: (1) it did not have jurisdiction to rule on the constitutional issue presented in Question A, but as to the statutory issue, HRS Chapter 87A permits the EUTF to provide health benefits to State and County retirees and their dependents that are different from and/or inferior to those provided to State and County active employees and their dependents; (2) in order to answer Question B, the EUTF Board would have to engage in speculation, consider theoretical or hypothetical situations, and render an advisory opinion, so the EUTF Board refused to answer Question B; and (3) the EUTF health benefits plan satisfies HRS Chapter 87A's statutory requirements (again declining to address the question of constitutionality).

         On October 5, 2007, Appellants appealed the EUTF Board's decision to the Circuit Court. [8] After briefing and oral argument, on July 23, 2008, the Circuit Court entered a Decision and Order Reversing the Decision of the [EUTF Board], concluding, inter alia, that: (1) article XVI, section 2 of the Hawai'i Constitution (the Non-Impairment Clause) "protects the accrued benefits but by so doing does not and has not prohibited the State legislature from changing the benefits for prospective employees;" (2) the phrase "similarly situated beneficiary" in HRS § 87A-23 "invokes comparison between retirees and active employees, not [just between] Medicare eligible retirees and early retirees who by age do not yet qualify for Medicare, " thus, health benefits that are provided to retirees must "reasonably approximate" the benefits provided to active employees; and (3) some of the retiree health benefits included in the plan did not "reasonably approximate" the benefits provided to active employees, in violation of state law. The Circuit Court entered a Final Judgment on August 18, 2008. See Everson, 122 Hawai'i at 406, 228 P.3d at 286.

         On September 15, 2008, the State and Counties appealed the Circuit Court's decision to the Hawai'i Intermediate Court of Appeals (ICA). Id. On May 21, 2009, the State filed an application to transfer the appeal to the Hawai'i Supreme Court, which was granted on June 10, 2009. Id. On March 25, 2010, the supreme court issued an Opinion, affirming in part and reversing in part the Circuit Court's decision and holding, inter alia, that:

[T]he circuit court did not err in concluding that a retired state and county government employee's health benefits are protected by article XVI, section 2 of the Hawai'i Constitution as "accrued benefits" arising from a retiree's membership in the employees' retirement system; and (2) the circuit court erred by concluding that HRS Chapter 87A requires that retiree health benefits reasonably approximate those of active workers.

Everson, 122 Hawai'i at 404, 228 P.3d at 284.

         C. Resumption of the Class Action

         After the supreme court's decision in Everson, the stay in the instant case was lifted, and the proceedings resumed before the Circuit Court. Following class certification, and the filing of a Second Amended Complaint, [9] the parties filed cross-motions for partial summary judgment on the merits.

         Appellants' motion, filed on December 10, 2012, argued primarily that: (1) as held in Everson, retirees' accrued health benefits are constitutionally protected benefits under article XVI, section 2 of the Hawai'i Constitution; (2) the benefits provided by the EUTF for retirees are not "substantially equivalent, " but rather are inferior as a matter of law, to those provided to active employees; and (3) the retirees' loss of parity with active employees on health care benefits constitutes a diminishment and impairment of the retirees' accrued benefits in violation of article XVI, section 2.

         In opposition, the State argued that: (1) retirees did not have parity with active employees prior to July 1, 2003, as the majority of active employees were in different plans operated by the unions; (2) the EUTF has not impaired retiree health benefits, as retirees are provided with the same or better health benefits as they had prior to July 1, 2003; (3) retirees are not entitled to the same benefits as active employees, by statute, by contract, or by the Constitution; (4) overall, retirees are receiving substantially equivalent health benefits as active employees; (5) providing retirees with benefits identical to those offered to active employees would diminish the retirees' benefits, as providing identical benefits would likely result in the loss of the full integration method of Medicare coordination and the favorable prescription drug plan; (6) the base monthly contribution caps in HRS Chapter 87A do not diminish accrued retiree health benefits[10] and do not violate HRS § 87-6(c);[11] and (7) accrued retiree health benefits may be reasonably modified, provided that any disadvantageous changes are balanced by advantageous changes.

         The State's cross-motion, filed on July 25, 2013, argued that: (1) the State has not violated Appellants' constitutional or contractual rights because the EUTF's retiree health benefit plans since 2003 have provided coverage that is substantially the same, if not better, than what retirees had before then; (2) the State has not violated Appellants' statutory rights as there was no intent to create vested rights under HRS Chapter 87 and/or the State has not violated the provisions of HRS Chapter 87; (3) the State is not liable for negligence because the State has not breached any constitutional, statutory, or contractual duty; (4) Appellants' claim that retirees must have the same health benefits as active employees is wrong; and (5) res judicata and collateral estoppel do not preclude granting the State's motion.

         In opposition, Appellants argued: (1) res judicata and collateral estoppel bar the State from re-litigating whether there was parity between active employees' and retirees' health benefits and that this lack of parity violated article XVI, section 2; (2) Judge Border determined, in conjunction with class certification, that constitutionally protected health benefits accrue at the time of vesting, which is during employment rather than at pre-enrollment in the retiree health plan, and that Judge Border's determination is binding law of the case; (3) class members' accrued health benefits were diminished because prior to July 1, 2003, retirees enjoyed parity with respect to active employees' health benefits, which was mandated by Chapter 87, and they no longer have such parity; (4) the relevant comparison is whether the retirees receive the same health benefits as the active employees, not whether they receive the same health benefits as had been provided through the Health Fund; and (5) even if the EUTF and Health Fund retiree health benefits are compared, the retirees' EUTF plans are inferior to those offered by the Health Fund.

         The four Counties each filed joinders in the State's opposition to Appellants' motion for partial summary judgment, as well as joinders in the State's motion for partial summary judgment. Appellants filed a reply memorandum in support of their partial summary judgment motion. The State also filed a reply memorandum in support of its partial summary judgment motion, which the Counties joined. On October 30, 2013, a hearing was held on the cross-motions and the matter was taken under advisement.

         On October 16, 2014, the Circuit Court entered the Summary Judgment Order. The Circuit Court concluded, inter alia, as follows:

The dispositive question for this court is whether Plaintiffs' health benefits have been diminished or impaired in light of the 2001 legislative amendment that no longer required health benefits to be equally available to all employee-beneficiaries. As discussed below, the court concludes that although the EUTF is not required to provide retirees with the same or equivalent health benefits as active employees, retirees' health benefits have not been impermissibly reduced because state and county retirees receive the same or substantially the same health benefits under the EUTF that they received under the PEHF. As such, there has been no diminishment or impairment of retirees' accrued health benefits.
. . . .
Under the PEHF, the law required that health benefits had to be "equally available to all employee-beneficiaries and dependent-beneficiaries selecting the [health] plan, regardless of age." HRS § 87-22(b). The term "employee-beneficiary" included active and retired employees. Thus, on its face and by definition, HRS § 87-22(b) required that the same health benefits had to be equally available to all employees, active and retired alike.
In 2001, when the legislature removed the longstanding requirement that health benefits had to be equally available to all employee-beneficiaries and replaced the PEHF with the EUTF to "establish a single health benefits delivery system for State and county employees, retirees, and their dependents, " the legislature did not intend for public employees or retirees "to suffer any diminishment or impairment of their existing health benefits." See Conf. Com. Rep. 124 on S.B. 1044 at 1097-1098.
Under the EUTF, it is undisputed that retirees do not receive the same health benefits as active employees receive. Instead, retired employees are enrolled in separate health plans, some of which contain different services and inferior levels of coverage, co-pays, maximums and deductibles than active employees receive under their selected health plans.....
While [] there are differences in the levels of coverage between the PEHF and EUTF HMSA plans for retirees, accrued health benefits for retirees have not been reduced, diminished or impaired since implementation of the EUTF. The differences in the levels of coverage between the EUTF and PEHF for retirees have remained the same or are substantially the same and, therefore, do not amount to a diminishment or impairment of health benefits for retirees.
As the Alaska Supreme Court noted in Duncan v. Retired Public Employees of Alaska, Inc., constitutionally protected "[h]ealth benefits must be allowed to change as health care evolves." "Health benefits can be modified so long as the modifications are reasonable, and one condition of reasonableness is that disadvantageous changes must be offset by comparable new beneficial changes."
The court concludes that the differences in the levels of coverage as between the PEHF and the EUTF HMSA plans for retirees, as illustrated above, [12] are reasonable. In addition, there is no evidence that the differences in the levels of coverage are disadvantageous to retirees on a group-wide basis. Rather, many of the benefits under the EUTF plans are the same or substantially the same than what retirees received under the PEHF plans.
. . . .
To reiterate, the dispositive issue here is whether Plaintiffs' accrued benefits, defined under Everson as health benefits in a health benefits plan for retirees, have been diminished or impaired because the EUTF is not required to provide the same health benefits to active and retired employees. The court concludes that the 2001 legislative amendment to the PEHF and the EUTF that removed the requirement that benefits had to be equally available to all employee-beneficiaries did not amount to a reduction in health benefits for retirees. Retirees receive the same or substantially the same health ...

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