Activists Seek New Tactics to Break Old Pension Deals

By: - January 7, 2011 12:00 am



It’s generally thought that the solution to the funding crisis in public pensions must focus on making cheaper promises to new hires while easing current employees out of expensive future plans. 

But not everybody agrees that those are the limits. A growing number of conservative activists believe the pensions of current employees may not be as politically and legally untouchable as has been believed. The issue is about to be tested as anger against public employee unions reaches a boiling point in a number of states.

For many in an active network of conservative groups, the political role model is New Jersey’s Republican Governor Chris Christie, who thinks that a lot more can be done legally to reduce the cost of pension rules for existing employees. 

Christie has made a number of proposals that would affect the pensions of employees with less than 25 years of service, the length of time required for vesting under New Jersey state law. “There’s significant reform and change that can happen for people with less than 25 years, which is really the majority of people in the system,” he said in announcing the proposals this fall. These benefits should not be sacrosanct when so many private sector workers have seen their 401(k)s vanish, and will not exist to be paid out anyway if significant changes aren’t made to the current system, he says.

Christie wants to increase the percentage of salary that employees must contribute to their pension plans to 8.5 percent. (These requirements currently range from 3 percent to 8.5 percent, depending on the program.) He also wants to adjust all salary calculations to a 5-year period to prevent employees from artificially inflating their pensions by earning high salaries in their final year of service. He would raise the retirement age to 65 for all state employees. Christie also has indicated that an even more aggressive proposal is in the works, with an announcement to come later this month.

“There are a lot of things that you can try to do,” says Bob Williams of the Evergreen Freedom Foundation. Williams is working with American Legislative Exchange Council (ALEC), a conservative group comprised of state legislators and corporate representatives, on model legislation that would dramatically reduce the pensions of current employees. “Some of that you expect will stand up in court; some of it you expect won’t,” Williams says. “But you can’t really know until you try.”

Targeting existing employees

As Stateline has previously reported, the debate about pensions began in earnest in 2010, with aggressive reforms in Vermont, Colorado and Minnesota. Those states mostly passed changes limited to newly hired employees — reducing their benefits, requiring them to contribute more of their paycheck, or raising the age at which they will be eligible to retire. But some revisions did target current employees and retirees.

Six states raised the amount that current employees are required to contribute. They include Colorado, Iowa, Minnesota, Mississippi, Vermont and Wyoming. Colorado and Vermont increased the penalty for current employees who leave the state before the normal retirement age. Colorado, Minnesota and South Dakota adjusted or eliminated cost-of-living increases for retirees; all three of those laws are currently being challenged in the courts.

Union representatives have attacked the most recent proposals as illegal. They also have faulted New Jersey for chronic underfunding of its pension system, including a $3.1 billion payment that the Christie administration skipped this year. Christie, for his part, has made it clear that he’s not afraid of a legal battle:  “If they want to sue me, tell them to get in line,” Christie told the Star-Ledger . “I’ve got plenty of lawyers to defend our positions.”

Many of the legal questions involved are surprisingly murky, and vary dramatically by state. “It is uncertain in many states what the constitutional protections are because they haven’t been tested or at least thoroughly tested in the courts,” says Ron Snell, director of state services at the National Conference of State Legislatures. “But state legislators have assumed the protections to be quite strong.”

Many states treat pensions as “contracts” under the law, while others treat them as “property rights,” which tend to be easier to modify. And in those that treat pensions as contracts, there’s significant variation in when that contract is deemed to take effect.  Nebraska protects pensions as soon as an employee begins working for the state; other states protect pensions only upon retirement, after an employee is fully vested, or at some other undetermined point during an employee’s tenure.

Model language coming

ALEC, which has become a formidable purveyor of conservative legislation in the states, has developed a model resolution that seeks to take advantage of what some scholars see as a significant legal opportunity offered by interpretations of the contracts clause of the U.S. Constitution. Model language in ALEC’s proposal, titled “A resolution to align pay and benefits of public sector workers with private sector workers,” says “the U.S. Supreme Court has ruled it permissible for states to modify contractual obligations for a significant and legitimate public purpose, such as the remedying of a broad and general social or economic problem.”

A draft of the ALEC resolution, which still has to undergo final approval by ALEC’s board, declares that accrued retirement benefit obligations to all state and local workers “shall be immediately adjusted to a level comparable to that of private sector workers for positions of comparable responsibility and direct compensation.” The resolution proposes that an independent federal review panel be created to make such adjustments, and suggests that sole jurisdiction over the changes be given to federal courts and not state courts because of “inherent conflicts of interest.”

Ralph Benko, a senior adviser at the conservative American Principles Project who worked with ALEC to develop the language, has concluded that the frameworks offered by two U.S. Supreme Court cases ( Energy Reserves Group v. Kansas Power & Light and United States Trust Company of New York v. New Jersey ) offer a promising legal opening for those who want to go after pensions. “Now there’s at the very least a persuasive, legitimate argument that we can do this,” Benko says. “Yes, it will require litigation and be challenged by the courts, but gosh, we have a strong case here.”

State Senator Jim Buck of Indiana, who chairs the ALEC task force that developed the resolution, emphasizes that the measure is meant to be used only in cases of true crisis. “It’s not summarily discarding a contract that you’re financially fit to take care of,” he says. “I don’t anticipate any state doing it unless they’re in a financial crisis.”

The problem with that argument, says Stephen Pincus, a Pittsburgh attorney who is representing retirees challenging the Colorado, Minnesota and South Dakota laws, is that it paves the way for a state to default on all of its existing contracts — the very situation the contracts clause of the U.S. Constitution was created to prevent. “They’re just saying, ‘Let’s go after the public workers,'” Pincus says. “If there is a real general threat to the financial well-being of a state or local government, then everything should be on the table, not just one set of contracts.”

Benko has worked with lawmakers from Arizona on some of the new approaches, and expects that state to be among the first to test the waters. Because of protections in the Arizona constitution, the first step would be to send a ballot measure to voters in 2012 revising state constitutional language that protects pensions. This is a step that lawmakers are reportedly considering. A related proposal would make a change that is bound to attract the attention of legislators: It would abolish the pension system for elected officials.

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Melissa Maynard

Melissa Maynard oversees the Pew state fiscal health project’s Fiscal 50 online resource, which helps policymakers understand fiscal, economic, and demographic trends affecting their states by tracking tax revenue, reserves, employment rates, Medicaid spending, and other issues important to long-term fiscal health.