Several states want to "break the glass" to save their public pensions from fiscal ruin. The only question is, will the courts allow them to do so?
For decades, the defined-benefit retirement plans relied on by millions of government employees such as schoolteachers, police, and transit workers have been sacrosanct; few if any state lawmakers dared to suggest adjusting benefits promised to retirees as a way to save money and ensure the long-term viability of the pensions for fear of enraging the politically powerful public employees unions. The most any state has been willing to do is adjust benefits for new government employees, as Illinois and New Jersey did earlier this year.
But times have changed. A new study by the National Center for Policy Analysis shows that the public employee pensions are underfunded by an estimated $3.1 trillion – three times higher than reported previously. There are now whispers in some circles that the states, already overwhelmed by the recession and years of overspending, cannot afford the pensions and plan on seeking a federal bailout of the pensions. Besides the economic ramifications, a federal bailout of public pensions also has political, legal, and social aspects that we are only beginning to understand. In these extraordinary times, states must take extraordinary measures.
Now, some states are willing to adjust benefits for future and current retirees because no good alternative exists for shoring up the pensions. This year, Minnesota, Colorado, and South Dakota voted to limit cost-of-living adjustments (COLAs) enacted in previous years because they cannot afford to pay them. According to Stateline, Colorado, in the face of projections that the state's pensions will run out of money within 30 years eliminated the 3.5 percent COLA planned for this year. All future increases will be set at 2 percent, unless the funds investments experience another huge decline in value. Meanwhile, Minnesota eliminated a 2.5 percent COLA and set any future increase for its pension plans to between 1 and 2 percent. South Dakota reduced its COLA by 1 percent and tied future increases to the market.
Unsurprisingly, current retirees are challenging these decisions in court. The retirees argue that their pensions are contracts and, therefore, are protected against impairment by the contracts clause of the Constitution. Conversely, the states are arguing that the economic crisis is like nothing ever seen before and the states, out of “actuarial necessity,” need the ability to adjust pension benefits to save the plans from collapse. The Minnesota case shall be the first to be heard on September 15. If these states win, others may be emboldened to make the difficult choices necessary to protect the pensions from fiscal collapse. But if the retirees win, then the pressures on the plans will increase and the states will not have many options short of massive tax increases and borrowing. With all that is happening in pensions today, these cases are worth your time following.