Nursing a failing pension system back to health is no small feat. At a minimum, reformers must develop complex actuarial models to assess the impacts of reform proposals, educate policymakers and stakeholders on the nuances of pension policy, and muster sufficient political will to enact reform policies.
But, as is the case for most landmark reforms, signing policy into law isn’t the end of the story. Benefit reductions, changes to retirement ages, contribution increases, and other reform measures often face legal challenges, and 2016 was no exception. Overall, it has been a good year for pension reformers, though legal hurdles still need to be cleared in some states.
The biggest victory for reformers was Berg v. Christie, where the New Jersey Supreme Court upheld a 2011 reform freezing cost-of-living adjustments (COLAs). The decision hinged on whether the COLA was included under a section of the statutes governing New Jersey’s pension system that made pension benefits a “non-forfeitable right.” Most states, New Jersey included, have statutes, constitutional amendments, or legal precedent protecting vested benefits as contracts. Whether a benefit can be amended, therefore, depends on its vested status.
The court found that while other benefits are covered under the “non-forfeitable” provision, “the plaintiffs needed to demonstrate the legislative intent to render future COLAs part of the non-forfeitable right…was unmistakable.” Absent this unmistakable intent, the court upheld the reform, saving the Garden State from an additional $13 billion in liabilities.
The 6th U.S. Circuit Court of Appeals applied similar logic in Frazier v. Chattanooga, upholding an ordinance reducing COLA benefits for police and fire pensions. The court found no “unmistakable” evidence the city intended to be bound to a fixed COLA. As in Berg v. Christie, the decision was partly based on the fact that COLAs were not in the same section of the governing statute as the vested benefits.This decision saved the city as much as $227 million in benefit payments by 2040. The 6th Circuit made similar decisions earlier this year in Duncan v. Muzyn and Puckett v. Lexington when it ruled that the COLA provisions in the TVA and Lexington police and fire pension systems’ governing statutes did not “indisputably” vest a specific COLA.
Finally, Rhode Island’s CPRAC v. City of Cranston upheld a reduction in COLA benefits the court held were vested because it was necessary to prevent a fiscal crisis. In a settlement approved by the Rhode Island Superior Court, the State and most public sector unions in the state agreed to a benefit reduction. Police unions rejected the agreement but failed in the courts because, while the benefits were vested, the reductions were necessary for the public interest.
The Contracts Clause of the United States Constitution prohibits states from impairing contracts, but in the 1977 case US Trust Co. v. New Jersey, the Supreme Court held “laws impairing the obligations of private contracts…may be constitutional if it is reasonable and necessary to serve an important public purpose.” The Court distinguished between “public” and “state” purpose (the government can always find a use for extra money), but states may impair contractual obligations if it serves an important public interest.
While 2016 produced an impressive string of victories for those changing COLA payments to help improve solvency, other pension reform efforts were upended in the courts.
Most notable was November’s Arizona Supreme Court decision in Hall v. Elected Officials’ Retirement Plan, where a 2011 reform increasing employee contributions and changing the funding process for post-retirement benefit increases was struck down because the adjustments were ruled to be in violation of the Pension Clause of the Arizona Constitution. The clause states — as do similar constitutional provisions in states like Alaska, Illinois, and New York — “public retirement system benefits shall not be diminished or impaired.” States with such pension protection clauses have proven to have an extra, durable layer of legal protection for the way pension benefits are defined that is above and beyond the federal and state constitutional contracts clauses.
In AFT v. Michigan, the Michigan Supreme Court found a 2010 act requiring an additional 3% contribution to the public school employees’ retirement system and the 2012 act revising the law to be unconstitutional because they violated myriad protections in the U.S. and Michigan constitutions. The 3% increase was paid for by an equivalent reduction in employee salaries, and, although this money was for contributions to the employees’ pensions, it still constituted a taking.
Another expansive reform, this time to Illinois’s retirement system, was struck down for violating the Illinois Constitution in Jones v. Municipal Employees’ Annuity and Benefit Fund (MEABF). The act increased both employer and employee contributions in addition to restricting post-retirement annuity increases. The Illinois Supreme court found the reform, backed by 28 of the 31 unions affected, “diminished or impaired” employee benefits, in violation of the state constitution.
What can pension reformers learn from this year in the courts? First, the importance of carefully choosing the language governing pension statutes cannot be understated. In half of the cases discussed above, the decisions rested on whether COLAs or other benefits were included in the sections of the statutes that defined vested benefits. While there has been a shift to a presumption against statutes creating contracts absent “unmistakable” intent, statutory and constitutional protections for vested benefits can stop pension reform dead in its tracks. Legislators can’t put the genie back in the bottle in most cases, but future reformers should remember this when writing new statutes.
Second, cooperation with public sector unions, if possible, can keep pension reform out of the courts if unions can stave off legal challenges. Pension reform isn’t about hurting government employees or the unions that represent them; it’s about saving state and local governments from fiscal catastrophe, thereby providing workers and retirees with sustainable retirement benefits. In his State of the State Address, Governor Christie said a proposed constitutional amendment requiring the state to make the full pension contribution would make all other government functions “subject to elimination to pay for the pensions of 800,000 current and former public employees.”
Christie misses the point entirely. Because benefits are “non-forfeitable rights” in many cases, discretionary spending is subject to elimination if necessary to make pension contributions. If states want to free up money for other government services by modifying vested benefits in cases when the law may not be on their side, they will need to work with public employees’ unions.
Even so, deals with unions are fragile and can be easily undermined. CPAC was filed because Cranston retirees refused to go along with an agreement between public employees and Rhode Island, and the plaintiffs in Jones were 14 members of the MEABF. Cooperation with unions gives legislators the ability to make more expansive reforms, but it only takes one rogue union or a few disgruntled pensioners to undo the entire effort.
Third, even in instances where the law provides no opportunity for reform and unions are unwilling to compromise, the body of precedent permitting benefit modifications in the face of bona fide pension crises is growing. CPRAC relied on US Trust’s logic. The use of this precedent when pension systems across the country find themselves in increasingly dire straits could mark a bellwether for future decisions upholding pension reform legislation out of fiscal necessity.
Hopefully pension reformers, unions, and courts can find solutions to protect both public employees’ retirement security and governments’ budgets in 2017. Until then, here’s to a happy and (fiscally) healthy new year.
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