State pension reform hampered by judicial opposition

Although many states have chosen to take divergent paths, the courts have prevented the restructuring of several of them, forcing administrations to work within the confines of their employees’ retirement plans. As a result, public employers do not have the flexibility to adjust the rate at which a worker can accrue benefits, including for work an employee will do in the future. This restriction inhibits pension reform and the ability to manage the high cost of public employee pensions with insufficient funds and often without restrictions.

CONTRACT PROBLEMS

Why do the courts have the authority to prevent the public sector from making changes to its pension plans?

In a Bloomberg article on October 16, Steven Malanga, senior editor of ‘City Journal’ and a senior member of the Manhattan Institute think tank, wrote: “Many legal protections afforded to public sector pensions arise from court decisions dealing with laws governing public retirement systems as a contract between the state and a worker. “

“That puts pensions under the jurisdiction of the contract clause of the US Constitution, or under state contract law,” according to Malanga.

For decades, California courts, including the California Supreme Court, have been rigorous in upholding contract law to preserve pensions. Not only does the worker’s contract begin on the first day of employment, according to Amy Monahan, a professor at the University of Minnesota School of Law and author of a 2012 Iowa Law Review article on California’s position, it protects accruals. past and future pensions. .

Although federal court decisions have held that potential contract changes are not unconstitutional, Monahan notes that 12 other state supreme courts have, in essence, created a bloc that adopts California’s rule on pension law. These states include: Alaska, Colorado, Idaho, Kansas, Massachusetts, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Vermont, and Washington.

Additionally, California courts have expanded the rule to include other benefits such as medical care. In 2011, the California Supreme Court applied the precedent to retiree health care benefits, ruling that, like pensions, they are an acquired contractual right that cannot be changed. In September, a Los Angeles judge ruled that the city could not freeze its retiree health care benefits.

Efforts from other states

There has been a concerted effort to amend state constitutions so that governments can modify retirement plans for public employees.

Not surprisingly, one of the leading advocates for pension reform comes from California. Chuck Reed, the mayor of San Jose, has launched a proposed ballot initiative to specifically address and abolish the Supreme Court precedent to allow for pension reform. San José’s annual payments to fund government pensions have increased from $ 73 million in 2002 to $ 245 million in 2012.

New Jersey voters are starting small. They approved a minor change to their constitution related to the reform of judges’ pensions. In 2011, judges disputed state legislation that required them to contribute more to their retirement. When a state judge blocked the proposal in court, the legislature put an amendment on the ballot to change its constitution, and 83 percent of voters approved it.

The state with the unfortunate title of “worst state pension crisis in America” By Moody’s Investor Service it is Illinois, where public union leaders argue that the Illinois constitution denotes that the state cannot make changes to its pension system for current workers. Noted Chicago law firm Sidley Austin LLP challenged that line of reasoning in a brief, saying the clause only protects benefits that have already been earned. Proponents of pension reform have advised the Illinois legislature to at least enact changes and see if the state Supreme Court rules that they meet the required standards. If the court fails to do so, the state constitution amendment may finally gain some traction this time, as Illinois is spending $ 6 billion of its $ 31 billion general fund on pensions, rising rapidly from $ 1.8 billion. million in 2008.

Even Colorado, a supporter of the California approach, is looking for alternatives. After the state legislature cut annual cost-of-living increases for pensions in 2010, retirees sued to stop the changes. In 2011, a district court ruled in favor of the reduction, but a higher court reversed that ruling. The Colorado Supreme Court is now considering the case.

If Reed is successful with his California voter initiative plan, other states can follow suit. Meanwhile, tough fights are coming at The Golden State and elsewhere. However, without the ability to adjust for unearned retirement benefits, state taxpayers can expect rising pension costs in the coming years, while public employees and retirees will likely see their benefits reduced through of bankruptcy.

November of 2013