BOARD OF TRUSTEES OF THE UNIVERSITY OF KENTUCKY v. GIFFORD BLYTON; LESLIE L. MARTIN; HELEN H. DENBO, AS PERSONAL REPRESENTATIVE OF THE ESTATE OF BRUCE F. DENBO; and DR. A. LEE COLEMAN
Annotate this Case
Download PDF
RENDERED:
October 30, 1998; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO. 1997-CA-000565-MR
BOARD OF TRUSTEES OF THE
UNIVERSITY OF KENTUCKY
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM, JUDGE
ACTION NO. 80-CI-0523
GIFFORD BLYTON; LESLIE L.
MARTIN; HELEN H. DENBO, AS
PERSONAL REPRESENTATIVE OF THE
ESTATE OF BRUCE F. DENBO; and
DR. A. LEE COLEMAN
APPELLEES
OPINION
AFFIRMING IN PART, REVERSING IN PART, AND REMANDING
* * *
BEFORE:
BUCKINGHAM, KNOX, AND SCHRODER, JUDGES.
SCHRODER, JUDGE:
The Board of Trustees of the University of
Kentucky (Board) appeals from a final judgment of the Franklin
Circuit Court, ordering the Board to pay appellees damages for
breach of the terms of the 1964 Retirement Plan that included a
supplemental payment to retired faculty.
Appellants argue that
the supplement is not an enforceable contract, that certain
members of the class of appellees should have been dismissed,
that the court erred in failing to consider parol evidence
indicating a modification of the terms of the supplement, and
that certain voluntary payments made to the appellees should be
credited against the supplement.
We find merit only in the
second contention.
Appellees represent 139 retired faculty members and
administrators of the University of Kentucky.
The retirement
plan includes a supplement which insures a minimum retirement
benefit should the retiree’s investment choice fail to yield
same.
When the appellees learned in 1977 of the appellant’s use
of a calculation assumption to determine the amount of
supplemental retirement income, they sued for breach of contract,
declaratory judgment, and injunctive relief.
The 1964 Retirement Plan provides in relevant part:
X. Group I Retirement Benefits Each Group I
participant in TIAA1 will receive from TIAA a
guaranteed, fixed monthly income for life
which shall be the actuarial equivalent of
the full value of his annuity accumulation at
the time of his retirement. Each participant
in CREF will also receive from CREF each
month for life a guaranteed number of CREF
annuity units, the dollar value of which will
change from year to year reflecting primarily
changes in the market prices and dividends of
the common stocks owned by CREF. Just before
retirement, each participant will choose from
several options available the manner in which
he would like to have his retirement income
from TIAA-CREF paid. All of these options
provide a lifetime income and all but one
provide income for the participant's
beneficiary in the event of his early death.
1
TIAA is an abbreviation for Teachers Insurance Annuity
Association, while CREF stands for College Retirement Equities
Fund. The employees had the choice of investing in either TIAA
and/or CREF. TIAA is the more stable of the two, being based on
fixed annuity contracts, guaranteed to pay at least the stated
rate of interest. CREF annuities are much more variable, based
on a stock market fund.
-2-
These options are set forth in the individual
annuity contracts issued to participants.
XI. Group I Supplemental Retirement Income
For all Group I staff members who were age 40
or older prior to July 1, 1964, and who were
eligible to participate in the Group I plan
on July 1, 1964, the University will provide
a supplemental retirement income during the
lifetime of the staff member, where
necessary, to assure a minimum benefit under
this plan equal to the salary received by him
at the time he reaches the age of 65*
multiplied by the percentage stated in the
next paragraph of this Section. The amount
of this supplemental income will be reduced
by the "primary insurance amount" of Social
Security retirement income to which the
employee is entitled from date of retirement
to age 72. Thereafter this supplement will
be in addition to all Social Security income
benefits. In determining the Supplemental
Retirement Income as provided above, the
following percentages of the salary at age
65* shall be used:
(a) 20% plus 1% for each year of service
** to the University
plus
(b) For those employees who had attained
age 56 prior to July 1, 1964: 1% for each
full year by which retirement precedes the
end of the fiscal year in which the
employee's 70th birthday is attained.
or
(c) For those employees who had attained
age 51, but not age 56 prior to July 1, 1964,
the following percentage:
Age
Percentage
51
52
53
54
55
1
2
3
4
5
-3-
In no event shall the applicable percentage
of salary at age 65 exceed 20% plus 1% for
each fiscal year between the date of
employment and the end of the fiscal year in
which the employee attains age 70.
In a February 6, 1992 order, the lower court found that
the Board breached the express terms of the retirement plan when
it failed to pay supplemental retirement income in an amount
sufficient to meet the minimum retirement benefit provided under
the terms of the plan.
In the February 5, 1997 final judgment,
the court awarded each employee, or his or her estate,
compensatory damages to be determined by a formula set forth in
the judgment, as well as prejudgment and postjudgment interest.
Appellants first argue that the portion of the
retirement plan addressing the supplement is not an enforceable
contract because it violates §§ 49 and 50 of the Kentucky
Constitution.
They maintain that because the supplement is paid
from UK's general operating budget, which is appropriated
biennially by the General Assembly, the Board has no authority to
contract away the General Assembly's right to decline to
appropriate money for the supplement.
Appellants contest the
circuit court's designation of the supplement as a "necessary
government expense," excluded from §§ 49 and 50, on the basis
that a supplemental fringe benefit for a retired professor is not
a necessary component of education, especially since it obligates
future legislatures to underwrite unpredictable stock market
losses.
We disagree.
-4-
Sections 49 and 50 provide that the Legislature cannot
contract debts in excess of $500,000 or incur additional debt
without the vote of the people of the Commonwealth.
Newman, 153 Ky. 604, 156 S.W. 154, 158 (1913).
Rhea v.
Specifically, §
49 states, in relevant part:
The General Assembly may contract debts to
meet casual deficits or failures in the
revenue; but such debts, direct or
contingent, singly or in the aggregate, shall
not at any time exceed five hundred thousand
dollars, and the moneys arising from loans
creating such debts shall be applied only to
the purpose or purposes for which they were
obtained, or to repay such debts[.]
Section 50 provides:
No act of the General Assembly shall
authorize any debt to be contracted on behalf
of the Commonwealth except for the purposes
mentioned in section 49, unless provision be
made therein to levy and collect an annual
tax sufficient to pay the interest
stipulated, and to discharge the debt within
thirty years; nor shall such act take effect
until it shall have been submitted to the
people at a general election, and shall have
received a majority of all the votes cast for
and against it: Provided, The General
Assembly may contract debts by borrowing
money to pay any part of the debt of the
State, without submission to the people, and
without making provision in the act
authorizing the same for a tax to discharge
the debt so contracted, or the interest
thereon.
We begin with the proposition that any doubt is
resolved in favor of constitutionality.
Agricultural &
Mechanical College v. Hager, 121 Ky. 1, 87 S.W. 1125, 1129
(1905).
Whether an appropriation is a debt is determined by the
manner of the payment (is it for more than $500,000 in a year?)
-5-
and the character of the appropriation.
James v. State
University, 131 Ky. 156, 114 S.W. 767, 772 (1908).
In Rhea v. Newman, 153 Ky. 604, 156 S.W. 154, 158
(1913), our highest Court ruled that § 49 of the Constitution
does not apply to ordinary expenses of the government, and public
schools and state universities must be maintained regardless of
the condition of the treasury.
A state’s educational
institutions must continue to function in order for the state to
exist.
Billeter & Wiley v. State Highway Commission, 203 Ky. 15,
261 S.W. 855, 860 (1924).
Therefore, the Rhea Court reasoned, an
appropriation made in support of a state institution is not a
debt.
We believe that the proper funding of the pension plans
of state university faculty promotes loyalty of staff and helps
to ensure their longevity at the institutions.
benefit from experienced teachers.
In turn, students
The supplement, guaranteeing
a minimum retirement benefit, rewards professors for their
faithful service.
See Board of Education of Louisville v. City
of Louisville, 288 Ky. 656, 157 S.W.2d 337, 346 (1941).
Thus, we
believe that the supplement aids in maintaining the university
every bit as much as equipment and physical upkeep do.
See James
v. State University, supra, in which it was held that money
appropriated to equip or repair a state university does not
require a special levy, as such does not create an indebtedness
against the Commonwealth.
Consequently, we do not consider the
-6-
supplement to constitute a debt subject to § 49 of our
Constitution.
Appellant next argues that the claims of members who
retired after the April 5, 1977 restatement of the plan should
have been dismissed because that amendment clearly set forth that
the supplement would be calculated on the assumption that every
member invested in TIAA.
The circuit court denied appellant’s
motion for partial summary judgment on this issue, having
previously ruled that the Board had breached the terms of the
1964 Retirement Plan.
We disagree with the lower court.
The 1977 amendment to the plan stated that in
determining whether each participant’s elected plan (TIAA and/or
CREF) had not reached the minimum annual retirement, thus
entitling the participant to a supplement, the Board would assume
that all contributions, from both the employee and the
University, were invested in TIAA, regardless of whether any were
actually invested in CREF.
Under the modification, no employee
would be entitled to a supplement as long as TIAA generated
enough money to meet the minimum annual retirement.
Appellant maintains that the following sentence from
the 1964 Retirement Plan allows for the above modification:
“The
University reserves the right to change the contribution rates
for Group I or at any time modify either of the plans in any way
that is not in conflict with the participant’s accrued
contractual rights.”
The Board believes that the appellees had
no accrued right in the supplement or the method by which it was
-7-
calculated because the supplement is wholly funded by the state.
Appellant also contends that the date of retirement, not
employment, governs the plan provisions applicable to each
participant.
We disagree with appellant’s reasoning.
Although there
is no Kentucky case on point, we approve of the approach taken by
the Nebraska Courts.
The term “accrued contractual rights”
refers to accrual or vesting in a legal sense because what is
being determined is the creation of a legally protected right,
not the fulfillment of specified, qualifying conditions which
determine when a participant’s right to a benefit becomes
effective.
Calabro v. City of Omaha, 247 Neb. 955, 967, 531
N.W.2d 541, 550 (1995).
The participants’
contractual rights to
the supplement accrued or vested before they became eligible to
collect their pensions.
Nor do we believe that the noncontributory nature of
the supplement denies the participants an accrued right in it.
Calabro, supra, involved a supplemental benefit plan whose cost
was paid by the city without any employee contribution.
It
provided cost-of-living increases to the pension benefits and was
found to constitute a pension.
The Court found the supplemental
benefit plan directly related to the pension plan since an
employee had to qualify for the latter before he could receive
the former.
The Court further determined that the pension plan
benefits were fixed when conferred; only their payment was
deferred to a later date.
We find this reasoning cogent and
-8-
therefore adjudge that the plan participants had an accrued
contractual right in the supplement.
The analysis does not end here.
We are next faced with
the question of whether the Board may nonetheless unilaterally
modify the terms of the retirement plan so as to reduce
participants’ benefits.
If the Board may do so, the Board has
not modified the plan so as to conflict with an accrued right.
Moreover, the question of whether the modification was supported
by consideration becomes moot.
While our research has not disclosed any case directly
on point with the one sub judice, there are many cases from
various states in which pension plan modifications were attacked
as violating the Contract and Due Process Clauses of the United
States Constitution.
These cases involve alterations of
governmental retirement plans by either the legislature or a
governmental body.
In order to borrow from the reasoning
utilized in these cases, we must first adjudge whether the
supplement can be considered a governmental pension plan.
The Board of Trustees of the University of Kentucky was
created by KRS 164.131, and its members are appointed by the
Governor.
It is an independent, public agency and an
instrumentality of the Commonwealth.
Board of Trustees of
University of Kentucky v. Public Emp. Council No. 51 American
Federation of State, County and Municipal Emp. AFL-CIO, Ky., 571
S.W.2d 616, 618 (1978); KRS 164.225.
state government.
The Board is an arm of
See Com. Ex rel. Cowan v. Wilkinson, Ky., 828
-9-
S.W.2d 610, 619 (1992) (Liebson, J. dissenting).
The University
of Kentucky is an agency of the state and enjoys sovereign
immunity.
KRS 44.073(1); Withers v. University of Kentucky, Ky.,
939 S.W.2d 340, 343 (1997).
In fact, the Board has been found to
enjoy sovereign immunity, which can only be waived by the General
Assembly.
See Board of Trustees of University of Kentucky v.
Hayse, Ky., 782 S.W.2d 609, 617 (1989), cert. denied, 497 U.S.
1025, 110 S. Ct. 3273, 111 L. Ed. 2d 783 (1990) and 498 U.S. 938,
111 S. Ct. 341, 112 L. Ed. 2d 306 (1990).
Thus, we consider the
appellees to have been public employees and their pension to be
governmental, and although the Board’s amendment of the
supplement was not attacked as violating either the Contract
Clause or Due Process, we find the case law to be didactic.
In general, courts view pensions in one of three ways:
(1) contractual in nature and subject to modification under
appropriate circumstances; (2) strictly contractual, and thus not
unilaterally modifiable; and (3) mere gratuities from the
government, alterable unilaterally at any time.
Davis v. Mayor
and Alderman of the City of Annapolis, 98 Md. App. 707, 715, 635
A.2d 36, 40 (1994).
The vast majority of states follow the first theory and
allow for modification by the governmental body if the changes
are reasonable, but if they result in disadvantages to the
participants, counterbalancing advantages must be provided.
Singer v. City of Topeka, 227 Kan. 356, 607 P.2d 467 (1980);
Moorhouse v. City of Wichita, 259 Kan. 570, 913 P.2d 172 (1996);
-10-
Halpin v. Nebraska State Patrolmen’s Retirement System, 211 Neb.
892, 320 N.W.2d 910 (1982); Calabro, supra; Davis, supra; Taylor
v. State and Education Employees Group Insurance Program, 897
P.2d 275 (Okla. 1995); Nonnenmacher v. City of Warwick, 1997 WL
839913, 1997 R.I. Super. 314 (1997); Gatewood v. Board of
Retirement, 175 Cal. App. 3d 311, 220 Cal. Rptr. 724 (1985).
Arizona employs the second view.
109, 402 P.2d 541 (1965).
third theory.
Yeazell v. Copins, 98 Ariz.
We have found no cases espousing the
In fact, the idea of a pension coming from the
largess of the sovereign has been roundly criticized as medieval.
Davis, 635 A.3d 36, 40.
We perceive the majority view to be the most logical
and adopt it here.
We are benefitted by Nonnenmacher, supra,
wherein the Rhode Island Court instructed that an alteration is
reasonable if it advances the public interest in keeping the
system sound and flexible; that is, the adjustments coincide with
changing conditions consonant with fiscal responsibility, yet
retain the plan’s integrity.
The changes made to the supplement were certainly
reasonable.
Under the prior scheme, there was no incentive for a
participant to invest in TIAA.
The more aggressive CREF plan
could result in higher yields as it was tied to the stock market,
but if it did not, participants were assured of a minimum benefit
amount.
The 1977 restatement eliminated UK’s underwriting the
stock market.
We agree with appellant that the taxpayers should
not have to indemnify plan participants based on vagaries of the
-11-
financial world.
The change to the supplement coincided with the
bear market years, yet retained the plan’s integrity.
Participants were put on notice in 1977 that their risky
investments in CREF would no longer be underwritten.
They had
the opportunity to switch their investments to TIAA.
If TIAA did
not produce the minimum retirement benefit, the supplement would
still be used to ensure that amount.
The Board balanced the
public interest in fiscal responsibility with the interest of the
retirement participants in receiving a minimum retirement benefit
despite their choices of investment.
We also believe the changes clear the final analytical
hurdle.
Appellees were still entitled to substantially the same
level of pension benefits even after the 1977 restatement.
They
simply had to change their CREF investments to TIAA to ensure
themselves of the minimum retirement benefit.
Otherwise, they
knowingly took the risk that CREF would not yield the minimum
retirement benefit, and the supplement would not be available to
boost it to that amount.
Accordingly, the 1977 restatement of
the supplement was permissible, and appellees who retired after
its effective date should have been dismissed.
Appellant’s third argument is abstruse.
Appellant
seems to contend that the lower court erred by not allowing the
Board to introduce oral statements made about the TIAA
assumption.
Yet the body of appellant’s brief clearly also
raises the assertion that parol evidence regarding the
University’s conduct between 1964 and 1977 should have been
-12-
admitted to establish how to calculate the supplement based on
the second assumption adopted in 1977:
That the retiring employee elected the single
life annuity option the value of which is
computed on the basis of the employee’s age
at the time of retirement (regardless of the
options(s) actually elected at retirement).
Appellant maintains that the plain language of the 1964 plan
fails to take into account such factors as delayed withdrawal,
voluntary contributions, employment other than at UK, and the
effect of payout elections, all of which, the Board claims,
influence calculation of the supplement.
Appellees moved in limine to exclude any parol evidence
which would bear on the TIAA assumption.
In response, the Board
stated its desire to introduce a brochure and oral statements
made, beginning at an April 1964 faculty meeting, which, together
with the contract, define the obligations made to the employees.
The lower court ruled “that neither Plaintiffs nor Defendant
shall be permitted at the trial of this action to introduce any
evidence, whether parole [sic] or otherwise, of antecedent
understandings and negotiations for the purpose of varying or
contradicting the July 1964 Retirement Plan, as amended.”
Appellant asserted that this evidence would prove that even in
1964, it was both parties’ understanding that the TIAA and single
life-annuity assumptions would be used to calculate supplements.
The motion in limine plainly sought to exclude parol
evidence relating to the TIAA assumption, and we find no error in
the court’s ruling thereon.
Section XI of the 1964 plan sets
-13-
forth a very clear method of calculating the supplement for all
participants who retired between 1964 and the effective date of
the 1977 restatement.
As the plan was clear and unambiguous on
its face and fully integrated, it would have been a violation of
the parol evidence rule to allow introduction of the proposed
extrinsic evidence.
Potter v. Citizens Fidelity Bank & Trust
Co., Ky. App., 554 S.W.2d 397 (1977); England v. Spalding, Ky.,
460 S.W.2d 4, 9 (1970) (citing Restatement of the Law, Contracts,
§ 237 at 331).
Furthermore, appellant’s argument regarding the second
part of the assumption was never challenged by appellees in their
complaint or amended complaint.
Therefore, that issue was never
before the lower court, and we pretermit discussion of same.
Appellant’s final argument is that it should be
credited with voluntary increases in the supplement, namely cost
of living increases, unisex increases, and interest rate
increases against supplement payments.
In its August 11, 1993 Order, the court concluded:
No relationship can be discerned between [the
voluntary] payments and the University’s
contractual obligation to pay an amount of
SRI sufficient to achieve the Minimum
Benefit. Nor has the University presented
any evidence that these voluntary payments
were made in consideration of its obligation
under the Contract or that when made they
were intended or understood to the
supplemental retirement income as
contemplated by the Plan. And, although the
University correctly states that the
University did not “formally amend the
definition of the ‘Minimum Benefit’ in the
1964 Retirement Plan to include any of the
-14-
voluntary increases[,”] the same can be said
of the absence of any definitional expansion
of “supplemental retirement income” to
include the increases. Accordingly, as
payments distinct from the supplemental
retirement income payments required by the
Plan, the “voluntary” additional payment made
by the University shall not be used to reduce
or offset Plaintiffs’ eventual damages.
Defendants would contend that if Plaintiffs’
damages are not reduced by the amount of the
University’s voluntary payments, Plaintiffs
will be put in [a] better position than would
have been the case had the contract not been
breached. . . .
However, in this case the disallowance of the
University’s claim for credit or reduction
will not place the Plaintiffs in such a
better condition. Rather they will be placed
in the same position they would be and would
have been if the University had paid them the
proper amount of supplemental retirement
income in the first place. Had the
University done so, the Plaintiffs would have
received the required amount of supplemental
retirement income plus the amount of all
additional payments made by the University —
the identical position in which they will be
placed under this ruling.
We agree with the lower court’s reasoning and result.
The retirement plan is contractual, and, therefore, the rights of
the parties to it are bound by the contract.
Nothing in it
mentions offsets for the voluntary payments made by the Board
here.
We also find some guidance in the law of workers’
compensation.
Pension plans, like workers’ compensation
benefits, are part of the wage-loss system.
Coal Corp., Ky., 952 S.W.2d 696, 698 (1997).
Williams v. Eastern
In workers’
compensation, an employer is entitled to an offset of benefits
-15-
when a long-term disability plan, for example, provides benefits
which duplicate workers’ compensation benefits.
the benefit must be assessed.
The purpose of
Theoretically, retirement benefits
compensate retirees during a time in their lives when, due to
age, they are no longer able to work full-time.
The benefits are
paid as a consequence of many years of service and had been
contributed to by the employee, thus having reduced his or her
net pay during those working years.
None of the voluntary
payments in this case--cost-of-living, unisex, and interest rate
increases--duplicate the purpose of the retirement benefits,
although they may certainly enhance them.
Therefore, we agree
with the trial court that the Board is not entitled to any offset
for these payments.
Accordingly, the February 5, 1997 final judgment of the
Franklin Circuit Court is affirmed in part, reversed in part, and
remanded for further consideration consistent with this opinion.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEES:
Virginia H. Snell
Francis J. Mellen, Jr.
Cynthia Blevins Doll
Louisville, Kentucky
Denise H. McClelland
Lexington, Kentucky
Frederick J. McGavran
Cincinnati, Ohio
-16-
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
