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Pension Plan Changes Pose Challenges for Lawmakers



Lawmakers have become acutely familiar with the financial challenges caused by pension underfunding, and they're certainly aware of the political difficulties involved in trying to change pension formulas. But the legal hurdles involved in changing pension benefits can be formidable as well.

That was the lesson from one of several crowded panels on pension issues held this week at the annual meeting of the National Conference of State Legislatures in Chicago.

It's easy to change pension and other retirement benefit programs for new employees, as numerous states have done in recent years, said Amy Monahan, a law professor at the University of Minnesota. "New hires are always fair game, of course, because you haven't made any promises to those individuals," she said.

But current employees are another matter entirely. Since the middle of the 20th century, courts have held that pension promises amount to a contract between a state and its employees.

What kind of contract? That varies from place to place. Although most states have legal precedents protecting pensions that date back decades, the type of protection employees can count on can vary considerably, according to Douglas Greenfield, an attorney with Bredhoff and Kaiser.

Courts in some states will protect pension benefits from Day One of hire, barring changes that are detrimental to the employee -- including changes in future benefit accruals. Others say workers are not fully protected until they are vested in the system. Still others say firm protection only kicks in once a person actually retires.

As a result, recent litigation in various states have resulted in entirely different types of judgments. In Minnesota, for instance, the courts have ruled that the state can reduce cost of living increases even for those who are already retired. But in Florida, a trial court held that a prospective change to cost of living increases is not permitted, although that decision is under appeal.

"Why should pensions have greater protection than the job itself, or salary?" Greenfield said. "To create a longterm system, you have to have certainty."

Even adopting a constitutional amendment to change pension law within a state might not solve the legal dilemmas facing legislators, Monahan said. Public employees would still have recourse due to federal contract rules.

Any state can change a contract if it needs to do so to protect the public interest, she said -- if, say, pension underfunding creates such a financial burden that it puts public safety and welfare at risk. But it can only break a contract in such circumstances if that represents the "least drastic" course of action available to the state.          

Because pension funds aren't insolvent -- every state pension system can make its expected payments this year and next -- that's a high bar for them to reach.

That's why the Minnesota decision may be significant, Monahan argued. The court found that the pension system didn't have to be on the verge of default to demand significant changes. It was enough that lawmakers were trying to head off serious difficulties 10 years down the road.

At a separate panel on education, Dennis Van Roekel, the president of the National Education Association, underscored the fact that public sector unions are not about to give up the fight to protect pension benefits.

Public employees have always paid their share to fund pension systems, Van Roekel noted, while employers -- including states -- have not always paid theirs. Pensions for public sector workers average about $25,000 a year, he said, which is not enough for anyone to get rich but provides needed retirement security, particularly to those one-third of all teachers that are not covered by Social Security.

Collective bargaining, Van Roekel stressed, "is a process that I believe is absolutely essential to the American way of life and the middle class."

Still, many lawmakers at the NCSL meeting remain highly concerned about the massive underfunding of pensions and other retirement benefits, including health care. They were clearly eager to learn what states such as Rhode Island had done to change their pension systems.

"One of the good things about this downturn is these structural issues that we didn't deal with because we didn't have to, whether it was pension reform or teacher tenure or Medicaid, we've now had to deal with," said Mike Haridopolos, president of the Florida Senate. "If we don't, we're going to have massive problems."

 


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Alan Greenblatt is a GOVERNING correspondent.

E-mail: mailbox@governing.com
Twitter: @governing

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