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Analysis: Public pension fixes face stout legal challenges By Jim Christie and Lisa Lambert Posted 2012/05/08 at 3:24 pm EDT SAN FRANCISCO/WASHINGTON, May 8, 2012 (Reuters) — Public employees in San Jose, California's third-largest city, aregearing up for a marathon court battle if local voters approve ameasure in June to overhaul the city's pension system. "It's just a straight-up war with us," said Jim Unland, boardpresident of the San Jose Police Officers' Association, the unionrepresenting the city's police force. " Once the thing passes,we'll be in court for years." San Jose is part of a broader legal and political struggle shapingup across the United States as cash-strapped state and localgovernments, Republican- and Democratic-led, try to rein in risingpension costs that are gobbling up big chunks of their budgets. The stakes are high. Local and state officials have to make toughchoices between using their shrinking or flat revenues for localservices such as police, firefighters and schools, or making up forfalling financial returns on pension investments. The ballot measure being decided by San Jose's voters would requirecity employees to pay more toward their pensions or accept areduced retirement plan. "There is a strong case for reform in many places," said KeithBrainard, research director of the National Association of StateRetirement Administrators (NASRA), many of whose members arestruggling to get public pension funds in balance. "Since 2009, more than 40 states have made reforms to their pensionplans and ... in the few remaining others they are working onthem," Brainard added. State and local governments administer pension benefits for retiredpublic employees. The cost of providing for those guaranteedbenefits has been escalating at a time of shrinking governmentbudgets amid a weak economy. Many people receiving or due to getpension benefits are members of public sector unions. Most states have announced some sort of public pension reformssince 2008 - from Wisconsin, scene of mass protests in 2011 againstchanges in public workers' compensation packages, to Rhode Island,where the city of Central Falls last year filed for bankruptcybecause of an $80 million unfunded pension and retiree healthbenefit liability. States are short by $660 billion for future pension payments, a PewCenter on the States report last year showed. Some expect the PewCenter's next report, due this month, to show a bigger gap becausethe improvement in the stock market in recent months will takeyears to show up in actuarial values. In the 2001 fiscal year, large public pension plans had enoughassets to cover more than 100 percent of their liabilities. By2010, the ratio had fallen to 75.5 percent or lower in some cases,according to the Government Accountability Office (GAO), theinvestigative arm of the U.S. Congress. A study published on Tuesday by Boston College predicts that theasset-to-liability ratio probably will have fallen a bit further to75 percent in 2011 and 2012. The study says the ratio may pick up to around 82 percent in 2015,but depending on how the stock market performs, for 126 state orlocally run plans it could range as low as 74 percent. Some voters are not happy about losing services to preserve publicpension benefits for retired government employees that are, in somecases, much more generous than their own recession-batteredretirement funds. Public employees argue that they have worked forlower salaries than in the private sector in exchange for a secureretirement. QUICK FIXES Any quick fixes would be hard to carry out. Each state has its ownconstitution, courts, case law and retirement systems that affecthow they can try to rein in pension costs. Moira Kearney-Marks, a research analyst at the Federal Reserve Bankof Cleveland, said authorities trying to rewrite the rules have abig challenge on their hands. "The law is bound by considerations that are completely differentfrom those reformers might have in mind," she wrote in a blog postin April. "If you want to help public pension plans close theirfunding gaps by reducing benefits, the law will probably workagainst you." There are at least eight lawsuits nationwide contesting attemptedpension fixes, such as one in Florida that is aimed at saving $1billion a year by reforming public pensions. These lawsuitsgenerally are brought by public sector unions. "I think they will only grow," said Amy Monahan, a University ofMinnesota Law School associate professor looking at the wide rangeof legal challenges that states face. Even as legal battles unfold, local and state officials are pushingahead with pension savings, creating another potential blow totheir finances in the future if the unions win and past benefitshave to be made good, said Steve Baker, a spokesman for the NewJersey Education Association, a teachers' union. While legal fees pile up, the financial health of pension funds isworsening. In April, the Northern Mariana Islands, way out in thePacific Ocean, became the first U.S. public pension fund to filefor bankruptcy protection. States have tended to avoid trying to change pensions for existingretirees and have tried instead to raise retirement ages and lowerbenefits for new hires. While that strategy may help them avoidlawsuits, it also makes only a small dent in the financial problem. A case in point is Illinois, where pensions are among the mostpoorly funded in the country. Nearly two years ago, the stategovernment tried to cut retirement packages for new hires but itsunfunded pension liability remains at $83 billion. In fiscal 2013, starting July 1, state payments into the pensionsystem will hit $5.2 billion, or 15 percent of general revenuespending. It was 6 percent in 2008. In April, Democratic Governor Pat Quinn went further, makingexisting employees contribute more or take fewer benefits. Thatchoice was unfair and a violation of the state constitutional, saidMichael Carrigan, speaking for public worker coalitions. A more common approach has been to cut cost-of-living adjustments,or COLAs, for benefits, with 18 states either reducing oreliminating the annual increases, the GAO said. Two recent court rulings in Colorado and Minnesota upheld thestates' rights to change COLAs after challenges by unions. Florida is appealing a court ruling that its elimination of COLAincreases and its requirement of higher worker contributionsviolate the state constitution. "It is not clear what level of legal protection is provided in alot of states. It is an area of laws that is unfolding in front ofus," NASRA's Brainard said. While state courts are reluctant to back big changes to pensioncontracts, states can alter a contract if "it's reasonable andnecessary to provide a public service" and changes are done "in theleast drastic way," said the University of Minnesota's Monahan. The problem: defining what is drastic. "There's not a nice littlerule book," she said. (Writing by Tiziana Barghini, Editing by William Schomberg and WillDunham). The e-commerce company in China offers quality products such as Welding Manipulator Manufacturer , China H Beam Welding, and more. For more , please visit Metal Forming Machinery today!
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