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Legal battles over state pension benefits will continue for a long time [ClearOnMoney]
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Legal battles over state pension benefits will continue for a long time

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Commentary

Legal battles over state pension benefits will continue for a long time

21 Nov 2011 by Jim Fickett.

Many states would like to alter pension promises already made. State employees often claim that the pension plan implies a contract and that the state constitution prevents states from changing such a contract. In fact there is considerable variation in law between states and, within a state, in court opinion, on whether retirement plans imply a contractual relationship. In addition, it is often that case that a state can, in fact, abrogate contracts when the benefits are sufficiently great for the general population. All in all, expect legal battles over pension changes to feature prominently on the national landscape for a long time.

Many states want or need to reduce pension benefits for public sector workers. The legal situation is often summarized by saying that it is not too difficult to reduce benefits yet to be earned (for example, the retirement plan can be completely revised for new workers compared to existing workers), but it is nearly impossible to change any vested retirement benefits, that correspond to working years already completed.

Of course the legal situation is really much more complex than this, with many grey areas. In following up on the recent ruckus in Rhode Island, I found a ruling (39 page PDF) from Judge Taft-Carter in another recent (Sep 2011) Rhode Island pension dispute. This particular ruling does a very nice job of explaining some of the main legal issues involved.

The case before Judge Taft-Carter was about a number of cutbacks in retirement benefits enacted in 2009 and 2010 by the RI legislature. Here is a sample of the changes the unions were unhappy about – an increase in the age at which one becomes eligible for retirement, a decrease in the total pension amount, and a reduction in cost-of-living increases:

Specifically with regard to correctional officers and registered nurses employed by the State, … retirement allowances are available upon completing twenty-five years of service and attaining the age of fifty-five … Before the 2009 Act, these state employees were eligible to retire upon twenty-five years of service and attaining the age of 50. …

… For those employees who had not yet completed ten years of contributory service by July 1, 2005, the 2009 Act … reduced the maximum retirement allowance attainable from eighty percent to seventy-five percent. …

the 2010 Act eliminated the COLA for all retirement allowance benefits in excess of $35,000.

A primary legal issue involved is that most states are prevented by their constitutions from abrogating their own or private contracts. However pension plans are sometimes considered contracts and sometimes not and, further, it is sometimes possible to change contracts if doing so would sufficiently improve the general welfare. Here is a summary of the legal background (partly specific to Rhode Island):

Plaintiffs base their first constitutional challenge to the 2009 and 2010 Acts on the Contract Clause of the Rhode Island Constitution. Like its federal counterpart, that provision prohibits laws impairing the obligation of contracts. Article I, § 12 of the Rhode Island Constitution states: “No ex post facto law, or law impairing the obligation of contracts, shall be passed.” Article I, § 10 of the United States Constitution provides that “[n]o State shall . . . pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts.”

The Contract Clauses of the Rhode Island Constitution and the United States Constitution limit the power of the State “to modify its own contracts and to regulate private contracts.” Brennan v. Kirby, 529 A.2d 633, 638 (R.I. 1987) (citing U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1 (1977)). This prohibition is not absolute. Id. (citing Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 428 (1934)). A statute that modifies a public contract will “pass constitutional muster under contract clause analysis so long as it is reasonable and necessary to carry out a legitimate public purpose.” Id. (citing U.S. Trust Co. of N.Y., 431 U.S. at 25-26).

The Rhode Island Supreme Court has used the United States Supreme Court’s three- prong analysis for deciding whether a state law unconstitutionally impairs the obligation of contracts … This three prong analysis requires a court to determine

[f]irst, has the state law in fact substantially impaired a contractual relationship? Second, if the law constitutes a substantial impairment, can the state show a legitimate public purpose behind the regulation, ‘such as the remedying of a broad and general social or economic problem’? Third, is the legitimate public purpose sufficient to justify the impairment of the contractual rights?” Id. (citing Energy Reserves Group, 459 U.S. at 411-2).

The first question in a case like this is whether a retirement plan creates a contractual relationship.

When addressing the first prong of this three-prong analysis, a court must ask: whether a contract exists; whether the law impairs a right or obligation under the contract; and whether the impairment is substantial. … this Court will here conduct the threshold inquiry of whether there exists a contractual relationship, the precise issue now before this Court.

There is considerable variation across states and across courts on these questions.

Today, a majority of states recognize that public pensions give rise to contractual obligations. … Over the past century, a number of states have passed constitutional amendments protecting the contractual right of public employees to their pensions in varying degrees. … Rhode Island, however, has no such provision.

… state courts are not in agreement as to when they consider a contract to be formed, thereby triggering contract and takings clause protections. Nor are state courts in agreement as to what changes, if any, legislatures can make to public pension plans after employment commences. … Many jurisdictions discuss the realization of contract rights in terms of “vesting.” In other words, the amount of protection afforded public employees varies depending on when the employees “vest” in the contract.

At one end of the spectrum is the theory that an employee’s contract rights absolutely vest as soon as employment commences. …

At the other end of the spectrum is the theory that contract rights vest only upon retirement or eligibility for retirement. …

the Connecticut Supreme Court determined that its state pension plan created property rights and not contract rights. See Pineman, 488 A.2d at 810. These property rights were protected from arbitrary legislative action under the Due Process Clause.

Taft-Carter concluded that under RI law the state pension plan did not constitute a contract per se but, for employees who had already served 10 years, there was an implied contract.

to determine whether a statute gives rise to a contractual relationship for purposes of contract clause analysis, the Court must look to the language of the statute and the circumstances of its enactment. … In keeping with its exercise of caution in addressing constitutional challenges to state enactments, the Court begins with the assumption that the ERSRI [the pension plan] “merely declares a policy to be pursued until the legislature shall ordain otherwise.” …

The General Assembly, through the ERSRI, offered a retirement allowance and COLA as a form of deferred compensation not subject to collective bargaining. See Catania v. State Emps. Ret. Bd., 450 A.2d 1342, 1345 (Pa. 1982) (“Once the benefits are deemed to be a form of deferred compensation, an employee obtains certain contractual rights.”). In exchange, the state sought the acceptance of public employment and the “faithful and diligent” completion of that employment over a number of years, defined by years of service and/or reaching a certain retirement age. This “promise for performance” exchange is the hallmark of unilateral contract. See 1 Joseph M. Perillo, Corbin on Contracts § 3.16 (Rev. ed. 1993) (“The most common form of a unilateral contract is that in which the offeror makes a promise and asks some performance by the offeree in return . . . .”). …

Here, having completed ten years of service, Plaintiffs have partially performed. … As a general rule, “[w]here one party makes a promissory offer in such form that it can be accepted by the rendition of the performance that is requested in exchange, without any express return promise or notice of acceptance in words, the offeror is bound by a contract just as soon as the offeree has rendered part of the requested performance.” … In the case of pension offers, more than mere part performance may be necessary to render the offer irrevocable; some courts have sought substantial performance. … As a matter of law, the Court holds that ten years of contributory service is substantial. …

The case law does not preclude but rather supports this Court’s holding that Plaintiffs, as ten-year veterans of the State, possess a contractual relationship with the State pertaining to retirement allowances and COLA benefits

Since this judge was only considering a motion for summary judgement, the question was left unanswered whether the state had sufficient justification to break this implied contract.

From all of this it seems clear that the relevant general principles are ambiguous and that each case will have its own specific features and outcomes. With the legal situation so unclear, states will continue to try to alter retirement benefits already promised, employees will challenge such alterations, and the lawyers will be kept busy for many years to come.