In Arena v. City of Providence, 919 A.2d 379 (R.I. 2007), firefighters retired while a City ordinance granting retirees a five percent compounded cost of living adjustment ("COLA") was in effect. 919 A.2d at 392.
After the firefighters retired, the City passed new ordinances that reduced the COLA to three percent Id. at 383-84. The City applied the change in COLA benefit to firefighters who had retired prior to enactment of the new three percent ordinances. Id.
In concluding that the retirees were entitled to the benefits promised by the ordinance in effect at their retirements, the Arena Court examined three considerations:
(1) "the nature of the COLA benefit itself";
(2) the specific language of the ordinance;
(3) the body of federal case law pertaining to similar questions in the collective bargaining context. Id. at 392-95.
The Arena Court "scrutinized the nature of the COLA benefit itself" to determine whether and when the retirees' rights had vested. Id. at 392.
Generally, jurisdictions classify pension benefits as contractual, as a form of deferred compensation, or as a gratuity. Id.
Whereas "purely contractual pension rights . . . vest immediately once the employment contract is signed and employment begins, . . . benefits that are deemed deferred compensation vest when the employee completes his or her years of eligibility" for the particular retirement benefit. Id.
Following the rule formulated by In re Almeida, 611 A.2d 1375, 1386 (R.I. 1992), the Arena Court opted for a "middle-ground position composed of elements of both the contractual and deferred compensation theories" and held that "'the right to deferred compensation vests upon meeting the terms of employment, but that vesting is subject to divestment because it is conditioned on continued honorable and faithful service.' Therefore, in Rhode Island, pension benefits vest once an employee honorably and faithfully meets the applicable pension statute's requirements." Id. at 393.
Arena considered the specific language of the ordinance to be vital to determining the nature of the retirees' benefits. Id. at 393.
Lastly, the Arena Court examined federal case law concerning the vesting of COLA pension benefits in the collective bargaining context. Various jurisdictions have adopted a hybrid of contractual and deferred compensation theories to view COLA benefits as vested as of the date of retirement. Id. at 394-95.