For the second time in just six years, a class action lawsuit brought by a group of retired state and county employees challenging what they say were unconstitutional cuts to their health benefits upon retirement is back before the Hawaii Supreme Court.

At issue in the case, Dannenberg vs. State of Hawaii, is whether or not the Hawaii Medical Service Association health plan offered to more than 51,000 retired workers and their dependents through the Hawaii Employer-Union Health Benefits Trust Fund, or EUTF, violates a provision of the state constitution prohibiting accrued retirement benefits from being “diminished or impaired.”

The key questions posed in this appeal are at what point public employees’ health benefits vest and accrue, and are then considered constitutionally protected, and what level of benefits are protected.

City Financial Tower, the Hawaii Employer-Union Health Benefits Trust Fund's headquarters, is seen here May 28, 2014.
City Financial Tower, headquarters of the Hawaii Employer-Union Health Benefits Trust Fund PF Bentley/Civil Beat

During oral arguments before the Supreme Court last week, the plaintiffs’ attorney said his clients are receiving “constitutionally inadequate inferior benefits,” while the state contends retirees actually have superior health coverage at lower cost because of the way benefits are coordinated with those provided through the federal Medicare program.

The case has bounced up and down through proceedings at various layers of the the legal system like a slow motion yo-yo for the past decade. And it’s unlikely to be resolved any time soon.

But it’s a case with very real consequences.

Plaintiffs say they pay an ongoing price because they are getting health benefits which are less than what they earned during their working careers and were repeatedly promised would continue. To them, it’s a matter of equity, receiving what they believe they have earned and deserve to receive after their years of service.

The public also has a stake in the outcome.

The EUTF already faced a deficit, or unfunded liability, estimated at just over $9 billion as of July 1, 2015, according to an actuarial study prepared for the EUTF Board of Trustees, and a ruling in favor of the retirees’ claims could potentially add significantly to that figure. Those billions will eventually have to be paid by taxpayers one way or another in the decades ahead.

A Tortured History

The claims underlying this case arose following major changes more than 10 years ago in the way health coverage is offered to public employees.

In 2001, legislators created the EUTF to replace the Hawaii Public Employees Health Fund, which had administered the health plans since 1961.

One reason behind formation of the EUTF was a concern over rapidly rising health care costs tied to the rise of union-based health coverage.

In 1984, legislators had yielded to union lobbying and authorized public employee unions to negotiate their own health plans for active employees. The union plans had an advantage because they did not have to cover retirees, who typically have more health problems and correspondingly higher health care costs.

The Legislature’s open war this year against the Judiciary was both costly and counter to the public interest.

The only plans for retirees continued to be offered through the PEHF.  As a result, the unions could offer their members health plans with more benefits or fewer out of pocket costs than the traditional state plans, while leaving the costlier retirees for the state to provide for.

Within a few years, two-thirds of all active members had jumped from the plans offered by the health fund to those available through their unions.

But faced with soaring health care costs, the Legislature responded with the 2001 changes in the law.

When the new law went into effect two years later, the union plans were phased out and active workers forced back into new EUTF plans. Active workers and retired workers had separate plans with different levels of benefits.

This lawsuit was initially filed in 2006 on behalf of retirees who said the health benefits now available to them through EUTF were not comparable to their prior plans. In their view, this was an unconstitutional cut in benefits already earned.

Initially, the case was put on hold and the plaintiffs were told to take their appeal first to the EUTF itself. The agency ruled against them, finding that it wasn’t required to offer the same benefits to both retirees and active employees, and further that there had been no unconstitutional diminishment of their accrued retirement benefits.

Plaintiff’s appealed the agency’s decision, and Circuit Court Judge Eden Hifo reversed the EUTF ruling, now finding in favor of the retirees’ position.

That resulted in an appeal to the Supreme Court, and in 2010 the court handed down a landmark ruling, Everson v. State of Hawaii. The high court ruled the constitutional provision protecting “accrued benefits” of state employees includes health care benefits as well as pension payments. But the court also found that nothing in the law requires the state to offer the same health benefits to retirees that are offered to active workers.

The case then went back to the Circuit Court for further proceedings. In October 2014, Judge Jeannette H. Castagnetti ruled in favor of the state on a motion for summary judgment, and tossed the complaint out. Castagnetti reached her decision based on a comparison of retirement benefits under the old Public Employees Health Fund plans and the newer plans for retirees offered by the EUTF, which she found to be comparable.

The plaintiff retirees then appealed to the Supreme Court for the second time, taking issue with several specific parts of Castagnetti’s decision. The case was argued last week, and the recording is available on the Judiciary website.

A Political Hot Potato

The case returned to the high court at a politically sensitive point in time.

Tension between the Judiciary and key legislative leaders was obvious throughout the 2016 session. The Senate introduced and pushed several bills that would have undermined the independence of the courts by changing the process for appointing and reappointing judges. Other bills would have changed the way retirement benefits for judges are calculated, and resulted in direct personal financial losses.

It was widely understood that the legislative actions were in response to a court ruling that found legislators had failed to provide sufficient funding for the Department of Hawaiian Home Lands as required by the State Constitution.

Legislators saw the court ruling as a blatant attempt by the Judiciary to intervene in the Legislature’s exclusive power over the state budget, while the courts saw it as their responsibility to uphold the constitution’s requirements.

The bills eventually died, but the political tensions did not necessarily die with them.

And now the Supreme Court is being asked to make a ruling that could cost many times more than the amounts at stake in the DHHL case. Although the case hasn’t gotten much public attention, it’s surely being watched closely from the State Capitol.

In an unusual move, all five Supreme Court justices recused themselves from hearing the retirees’ health benefits case, as did Circuit Court Judge Steve Alm, who was appointed to replace Chief Justice Mark Recktenwald. Instead, the case was heard by Associate Justice Katherine G. Leonard of the Intermediate Court of Appeals, and four Circuit Court judges.

The  Code of Judicial Conduct does not allow justices and judges to discuss their reasons for choosing to recuse themselves, so we don’t know why they took the action. In testimony during a legislative hearing in March 2016, the acting director of the Legislative Reference Bureau said the justices likely recused themselves “because of the justices’ membership in the Employees’ Retirement System and the Hawaii Employer-Union Health Benefits Trust Fund.”

Recktenwald, who also recused himself when the case was before the court back in 2010, stepped aside from the current matter in April 2015.  However, the other four justices didn’t recuse themselves until December 22, 2015, a month after the DHHL ruling that so angered legislative leaders.

The public will never know whether the unusual degree of active legislative hostility toward the courts played a role in the recusals. But it’s another instance where the backroom politics at the Legislature leaves the appearance of improperly affecting the courts’ functioning, whether that appearance is justified or not.

With the high stakes and the less experienced judges left to handle the case, it won’t be any surprise if they sidestep the broad constitutional issues and bounce the case back down to the Circuit Court once again. Questions and comments during last week’s oral arguments suggest one likely path would be for the court to find that Judge Castagnetti made an error by dismissing the case without resolving conflicting testimony presented by expert witnesses for the two sides.

If the court takes this route, it could simply send the case back for a trial to fully consider the conflicting evidence. And that likely means the case will eventually be coming back to the Supreme Court for Round No. 3, no matter which side prevails.

The legal issues are knotty enough. The overlay of legislative-judicial conflict only makes it all the more complicated to resolve. This is the kind of case that needs to be decided on its legal merits without the decision being influenced, directly or indirectly, by the threat of political retaliation if the decision goes the “wrong” way.

It’s just another reminder that the Legislature’s open war this year against the Judiciary was both costly and counter to the public interest.

About the Author

  • Ian Lind
    Ian Lind is an award-winning investigative reporter and columnist who has been blogging daily for more than 20 years. He has also worked as a newsletter publisher, public interest advocate and lobbyist for Common Cause in Hawaii, peace educator, and legislative staffer. Lind is a lifelong resident of the islands. Read his blog here. Opinions are the author's own and do not necessarily reflect Civil Beat's views.