Public Administration and Public Service Law
Social protection systems;
Sickness benefit systems;
Freedom to join;
Freedom to remain or leave;
Principle of equality;
Principle of proportionality;
Prohibition of excess;
Principle of the unitary nature of personal income tax.
RULING No. 745/14
5 of November of 2014
The Constitutional Court declined to declare unconstitutional norms that provide for a 1% increase in the contributions paid to ADSE (Directorate-General for the Social Protection of Public Administration Servants and Agents), SAD (the in-house Health Service of the Republican National Guard and Public Security Police) and ADM (the Armed Forces Health Service) by their beneficiaries – contributions that are now equal to 3.5% of the latter’s base pay or retirement pensions. The Court found that these norms are not in breach of the constitutional principle of the unitary taxation of personal incomes, inasmuch as they do not create a personal income tax in addition to or different from the IRS tax. Where ADSE is concerned, the amounts in question constitute the subsystem’s own revenue and are allocated to funding the healthcare benefits it provides, which means that they do not constitute unilateral monetary payments.
Nor are the norms before the Court in violation of the constitutional principle of equality. Even though the beneficiaries of the health subsystems are deemed to be liable for the costs of the care provided by the National Health Service (SNS), one cannot say they are considered responsible for the totality of those costs. The Court reaffirmed its own previous jurisprudence, in which it had already held that the state must fulfil its duty to guarantee the right to healthcare via the SNS – a mandatory public service whose existence is irreversible under the Constitution, and of which ADSE, SAD and ADM beneficiaries are also users. The norms before the Court in the present case do not require that there be subsystems funded solely by their beneficiaries’ contributions, nor do they allocate the revenues from those contributions to payment of the healthcare costs incurred by the SNS.
The Court was asked to conduct this ex post facto review by a group of Members of the Assembly of the Republic, who questioned the constitutionality of norms that have increased the amount of the contributions to the ADSE, SAD and ADM health subsystems by one percentage point.
Healthcare during illness is provided to members of the Republican National Guard (GNR) and the Public Security Police (PSP) and their families by in-house health services known as SAD. The same type of care used to be given to military personnel by three subsystems, one for each branch of the armed forces, but these have now been merged into a single subsystem called ADM, which is subject to a regime parallel to that governing ADSE, which is the healthcare subsystem for other public servants.
Beneficiaries are free to join ADSE or not, and then to leave it at any time should they wish to. This is not the case of the SAD and ADM subsystems, membership of which is obligatory.
The system for funding the costs of the ADSE healthcare subsystem has undergone a transformation that began in 2009. However, to a large extent this process was determined by the signature in May 2011 of the “Memorandum of Understanding on Specific Economic Policy Conditionality”, which insisted on the need to reduce the budget costs of the Public Administration’s health subsystems and to bring in a sustainable funding model based on beneficiary contributions.
Before the Memorandum, contributions were already being deducted from the base pay or pensions of both serving and retired beneficiaries.
ADSE did not receive any transfers from the State Budget to fund its activities in 2012 or 2013. ADSE’s 2014 Activity Plan says that in that year it not only expected to be financially self-sustainable, but would also have a budget surplus which would help fund 2015.
The SAD and ADM funding structure is different from ADSE’s one. Both the costs of healthcare provided to SAD and ADM beneficiaries by SNS establishments and services and those inherent in the part-payment of the cost of medicines supplied by pharmacies are borne by the National Health Service budget. Operational healthcare costs and the costs of care provided to disabled ex-members of the Armed Forces are paid for by the Ministry of Defence.
Where the expenditure/revenue ratio for the three subsystems is concerned, at the time of this Ruling it was estimated that while ADSE would enjoy a surplus in 2014, the SAD and ADM subsystems would experience a budget deficit even after the increase in contributions.
Where ADSE was concerned, the authors of the review request focused their constitutional doubts on the 1% increase in the contributions paid by beneficiaries.
Violation of the principle that personal income tax must possess a unitary nature and of the principle of equality
The petitioners took it as a given that there was a causal link between the increase in the beneficiaries’ contributions and another legislative provision under which 50% of the revenue derived from the latter’s employers’ contributions should revert to the state purse. They concluded that while the two measures were legally autonomous, they were structurally dependent on one another. In their view it was necessary to analyse the combined effect of these norms, not only because of the causal relationship that existed between them, but also due to the special relationship of dependency which they said was visibly present because the norms’ budgetary impact was dependent on both measures functioning as proposed.
The Court was of the opinion that it was not possible to accept that the two solutions were normatively intertwined in the way the petitioners alleged. The reversion to the state’s coffers of half the revenues from the contributions paid by public integrated and autonomous departments, services and funds did not extend to any other income received by ADSE – namely that derived from the contributions deducted from the base pay and retirement pensions of ADSE beneficiaries. The latter income is consigned to payment of the benefits that ADSE provides to those beneficiaries in the fields of the promotion of health, the prevention of illness, treatment, and rehabilitation. This revenue is not allocated to any other purpose, and in particular is not transferred to the state purse in order to fund the state’s general activities.
It is thus not possible to conclude that any of the revenue from the ADSE contributions deducted from the pay or pensions of the subsystem’s beneficiaries is converted into general state revenues that can be mobilised for the state’s general goals.
The petitioners argued that the challenged norms created a personal income tax that is different from the IRS tax because it is only levied on one category of person, in contravention of the constitutional principle that personal income tax must be unitary. In this respect the Court took the view that the ADSE contribution regime cannot be categorised as a tax. A tax is a contribution of a type which the public authorities impose on everyone, or on a certain category of people, and is designed to finance the state and public functions in general; it is a unilateral monetary payment without any consideration in the form of a specific counter-payment or counter-provision provided to the taxpayer by the state, but only a generic consideration in the shape of the operation of the state’s departments and services. The contribution addressed in the present case does not possess these characteristics.
ADSE beneficiaries’ contributions constitute consideration for the benefits provided to them by ADSE. The fact that in 2014 the revenue received from beneficiary contributions exceeded the amount needed to cover the expenditure on the benefits provided by the subsystem does not change the nature of those contributions, given that the way in which the law consigns them means that, be it in the following year or thereafter, this surplus will always have to be allocated to payment of the cost of the benefits under the subsystem, thereby maintaining the specific consideration provided to beneficiaries. There is therefore no breach of the principle that personal income tax must be unitary in nature.
Turning to the allegation that the norms do not fulfil the constitutional requisites under which measures that restrict fundamental rights must be necessary and proportional, the Court said the issue raised by the petitioners involved both the increase in the contribution per se, and the amount of that increase. The petitioners argued that the budget allocation was not limited to that which was needed in order to safeguard other constitutionally protected rights or interests, and that the increase in the ADSE contribution was excessive and unnecessary.
The explanatory statement attached to the government bill containing the norms before the Court makes it clear that the immediate purpose of this legislation was to ensure ADSE’s medium and long-term self-sustainability. To the legislator’s mind, this can only be achieved by ensuring that ADSE is self-financing – i.e. that its funding is based on the contributions paid by its beneficiaries. The Court recalled that the overall structure of the principle of proportionality includes three subprinciples, which serve to implement the whole. The first is the principle that the means must be appropriate or fit for the purpose, which gauges whether there is a rational link between a measure which deprives people of something, including a right or legal possibility, and the goal of the public authorities’ actions. Second is the principle of need, or that the means must be indispensable, under which one seeks to determine whether the state has other, less onerous but equally effective means at its disposal with which to pursue its goal. Finally, under the principle of proportionality in the strict sense of the term the importance of each of the rights or interests at stake is weighed up, and it must be decided whether the extent to which one is fulfilled justifies the ensuing damage to the other(s).
Constitutional doctrine and jurisprudence are in general agreement that the principle of proportionality is less intensely binding on the legislator than on other aspects of the state; the judicial control based on this principle varies in extent and intensity depending on whether its object is a legislative act, an administrative act, or a jurisdictional act. The legislator (and possibly some other entities with regulatory competence) is recognised to possess a considerable freedom to shape legislation. This freedom is especially important with regard to the requisites governing both the appropriateness of the means employed and their proportionality in the strict sense. This in turn explains why the courts must restrict themselves to determining whether legislative regulations are manifestly inappropriate.
The petitioners alleged that the increase in beneficiary contributions was excessive and unnecessary because it was made at a time when heavy sacrifices were already being demanded of public sector workers and pensioners, and when the ADSE health subsystem enjoyed a budget surplus of around 140 million euros for 2014.
The Court said that the self-sustainability of a health subsystem is not exactly the same thing as that subsystem’s ability to (self)finance itself in a given year, so it is reasonable to assume that sustainability will presuppose the formation of surpluses. Inasmuch as the excess generated in one year is consigned to payment of the benefits which ADSE provides to its beneficiaries at any time, and transits to the budget for the next year, it can be said to serve the overall (self)sustainability of the system.
The Court recalled some of ADSE’s characteristics: it is a subsystem governed by the freedom to join and then remain as a member or leave again; and its role is to complement the healthcare provided by the SNS. This combination of freedom and complementarity allows beneficiaries who feel that their contributions are disproportionate to the benefits they receive to choose to renounce their membership of the subsystem.
Having said this, the ADSE subsystem has existed since 1963, and public servants and agents have made contributions deducted from their pay since 1979, so its beneficiaries have been making a significant investment in a certain type of healthcare financing, and this in turn means that leaving the scheme is not always a materially acceptable hypothesis.
In addition, in a state based on the rule of law there cannot be any areas of “non-law” – i.e. areas that are immune to jurisdicity and its various essential dimensions. The state cannot fail to observe the need to be faithful to the key structural principles that must underlie its actions, on the circumstantial pretext that one subsystem is merely voluntary and complements another. However, the Court also acknowledged that once adequately understood, the argument regarding the non-obligatory nature of membership of ADSE is not a negligible one when it comes to applying the principle of proportionality in the strict sense. From the point of view of relative values, the ablative force which the increase in contributions represents for beneficiaries is significantly smaller than that which would underlie the same measure if membership of ADSE was a sine qua non condition for obtaining healthcare.
In this context one must conclude that an increase of one percentage point in the contributions payable by beneficiaries of the ADSE subsystem is not a measure that is manifestly unbalanced or unnecessary.
Where the norms that require contributions to be discounted from the base pay and pensions of SAD and ADM beneficiaries are concerned, and after considering the previous legal regime, the Court found that here too the amendments only entailed changing the amount of the discounts applicable to both regular and extraordinary SAD and ADM beneficiaries.
Looking at the question of the constitutionality of these norms from the point of view of the state’s obligation to ensure the defence of the nation, compliance with the law and internal security, the petitioners alleged that the norms seek to evade the state’s responsibility for the healthcare of citizens whose functions in the service of the Republic and the Nation make them especially likely to find themselves in physically dangerous situations. The petitioners argued that it was unconstitutional to use an increase in contributions to achieve the self-sustainability of the ADM and SAD subsystems, when the latter are responsible for costs the petitioners considered must necessarily be paid for out of public funds. In their view, imposing the entire cost of funding the ADM and SAD subsystems on the beneficiaries, solely through their contributions, when it ought to be the state that bears that expense, was in violation of the Constitution, because the latter places the responsibility for national defence, compliance with the law and internal security on the state.
The Court noted that these norms do not presuppose the existence of a health subsystem funded wholly by revenue from its beneficiaries’ contributions. The norms increased the amount of the discounts which beneficiaries pay to the health subsystems, but do not do away with the latter’s public funding (in 2014, despite the rise in beneficiary contribution rates, these subsystems still needed public funds in order to pay for their expenses).
The alleged unconstitutionality was said to come from the fact that costs which the petitioners believed should be publicly funded are paid for out of income from beneficiary contributions. The questions raised by the petitioners therefore concern the use made of that income – a subject on which the challenged norms say nothing.
The Court concluded that although the norms may contribute to attaining the declared goal of self-sustainability, they are not capable of doing so on their own; nor do they themselves lay down anything about the costs which these health subsystems are supposed to provide for.
The challenged norms neither order the creation of a subsystem funded solely from beneficiary contributions, nor do they allocate the revenue from those contributions to payment of the costs of National Health Service care.
Given that the norms do not mean that the subsystems in question must be funded solely out of their beneficiaries’ contributions, nor do they say what expenses should be paid for with the income from those contributions, the Court was thus unable to conclude that the constitutional parameters advanced by the petitioners had been breached.
Violation of the principles of equality and proportionality
The petitioners also alleged that the norms they brought before the Court failed to respect the constitutional principles of equality, need and proportionality.
Their argument was that the beneficiaries also contribute to the cost of the National Health Service when they pay personal income tax (IRS). Having to also make parallel payments into their subsystems means they make multiple contributions, but do not receive any additional benefits as a result, because when they are treated by the SNS, the resulting costs are entirely recharged to the subsystems.
The Court took the position that one cannot say that the costs of the healthcare which these beneficiaries receive from the SNS are passed on in full to the SAD and ADM subsystems.
Successive budget norms have said that the costs of the healthcare provided by SNS services and establishments to beneficiaries of the GNR/PSP SAD and of ADM must be borne by the National Health Service budget. The cost of the part-payment by SAD and ADM of the price of medicines supplied to beneficiaries by pharmacies has been wholly reimbursed by the SNS since the entry into force of the State Budget for 2013, and the same has been true of the part-payment of the cost of complementary diagnostic resources (CDTRs) since 1 July 2013.
Turning to the principles of necessity and proportionality, the Court said that one of the grounds for finding that the principle of proportionality is not violated in the case of the ADSE health subsystem – the freedom to join and the freedom to continue to be a member or to leave – is indeed not applicable in that of the SAD and ADM subsystems, to which the respective beneficiaries are obliged to belong.
However, there was no evidence that the increase in the revenue from SAD/ADM beneficiary contributions would create a budget surplus which would in turn make the increase unnecessary and disproportionate. There was nothing to enable the Court to conclude that the increased revenue from beneficiaries’ contributions would exceed the costs of providing the benefits granted by the subsystems.
In the light of all the above, the Court found no unconstitutionality in the norms before it.
Three Justices dissented from the majority view in relation to all the norms addressed in this Ruling, and one only from that on the norms for the SAD and ADM subsystems. With regard to ADSE, the dissenting voices considered that the fact that this subsystem had not been dependent on any transfers from the State Budget since 2012, and that in 2014 it not only became self-sustainable, but generated a budget surplus, meant that subjecting its beneficiaries to an increased contribution designed to secure a surplus over and above the system’s self-funding needs, with the purpose of achieving budgetary goals linked to the consolidation of the country’s public finances, accompanied moreover by persistent austerity measures including cuts in pay and pensions and an increase in the fiscal burden, meant that this measure was unnecessary and excessive.
The dissenting Justices were not swayed by the counter-argument based on the beneficiaries’ freedom to join, and then remain in or leave, the subsystem. They said the increase in the contribution affected the synallagmatic relationship on which that contribution is based, regardless of whether membership is mandatory or optional.
Discounts in favour of ADSE are characterised as financial contributions to a public entity and fall within a category of taxes or other financial duties which is recognised in the Constitution and is similar to the contribution that workers pay to the social security system. Even though it is a format that can be distinguished from taxes or other financial duties in the strict sense of the term, it does share some of their characteristics to the extent that consideration is offered for it in the shape of the service provided to a certain circle or category of persons by a given public institution or entity on which public powers have been conferred. The Justices argued that there is necessarily a link between the contribution and the activity undertaken by the public entity, to the point that the contribution cannot be used to fund the state’s general expenditure, but only the public service that gives rise to the contribution; and thus that one cannot fail to accept the existence of a material connection between the cost or value of the service or items that are collectively provided and the amount that is demanded in consideration, and that the latter cannot substantially exceed the former.
They went on to say that ADSE continues to be a health subsystem which complements the SNS and corresponds to a public service. Given that a contribution is demanded in return for the benefits that are granted, the proportionality that must be controlled in this case applies to the beneficiaries who pay the contribution and benefit from the corresponding healthcare, and from this point of view it is indifferent whether the regime which says that membership of the scheme is obligatory or otherwise is changed or not. The complementary nature of the healthcare provided does not mean that one must not apply the principle of proportionality in the strict sense. Because this is a bilateral contribution (it would be unthinkable for it to be created without the reciprocal provision of a benefit), its amount must reflect the cost or value of the healthcare which constitutes the consideration for it. If this bilaterality were to be undermined because the amount of the contributions was excessive compared to costs of the benefits provided, the contributions would become a tax. This is why the criterion by which the amount of the contribution is judged must be the principle of proportionality.
If an excessive increase in the contribution were to compel beneficiaries to renounce their membership of the ADSE scheme, their interests would be sacrificed to a greater extent when compared to the value of the interest that increase was intended to pursue, inasmuch as the beneficiaries would no longer have access to the part-payment of the health-related expenses to which they had already contributed. It was not only not indispensable to pursue the interest in the system’s self-sustainability by creating financial surpluses, but that goal could even itself be thwarted if beneficiaries with the highest levels of pay were to leave the scheme because they could find health insurance on the open market whose premiums cost less than the contribution.
On the increases in the contributions to SAD and ADM, all four dissenting Justices said that the norms were particularly open to constitutional criticism. Membership of these health subsystems is not optional, and the government itself recognises that the specific conditions applicable to their beneficiaries mean that SAD and ADM may never be self-sustainable. The costs arising out of accidents on duty and occupational illnesses and the expenses incurred in relation to disabled ex-members of the armed forces, for which the state is responsible in their entirety, are also paid for out of these subsystems, albeit with additional funds provided by the State Budget. The cost structures of the SAD and ADM subsystems are very different from that of ADSE (the cost per beneficiary is much higher), and part of this difference can be attributed to the specificity of the work done by military and security personnel. The Justices said that the amount of the contributions should be determined in the light of the costs the presumed healthcare would entail for the group of beneficiaries of each of the two subsystems. Given that the costs which are directly attributed to the beneficiaries are not identified by the legislator, it is not possible to know whether the contribution/cost ratio passes the proportionality test. For as long as this is the case, the argument that these subsystems are experiencing a deficit cannot be used to justify a percentile increase in contribution. The dissenting Justices thus concluded that the measure could not be required at the time at which it was adopted, and this in turn meant that it fell afoul of the prohibition on excessiveness. Without that cost information it was reasonable to admit the possibility that the beneficiaries were paying for expenses for which the state alone ought to be responsible.
Rulings nos. 555/99 (19-10-1999); 484/00 (22-11-2000); 187/01 (02-05-2001); 73/09 (11-02-2009); 135/12 (07-03-2012); 862/13 (19-12-2013); and 572/14 (30-07-2014).