For many states and municipalities, the reality seems clear and ugly: figure out a way to reduce growing pension obligations or file for bankruptcy.
In Rhode Island, state treasurer Gina Raimondo used the power of her office to suspend cost-of-living increases to retirees, lengthen the time required before workers can earn a pension and offer an alternative 401(k) plan to state workers, one that significantly reduces the amount the state has to contribute.
In Louisiana, Governor Bobby Jindal helped create another kind of new 401(k) plan for state workers hired beginning in 2013. This new approach would create an investment account for new hires instead of requiring the state to make a traditional monthly contribution to a retirement plan. The change would save the state money and make Louisiana the only state plan in the country to put workers in a cash balance plan.
In Florida, the legislature decided to take a seemingly innocuous step: tell employees that they must contribute 3 percent of their pay to their retirement. Prior to the legislation, they were required to contribute nothing.
All are efforts by legislatures to curb their growing pension liabilities. And all have wound up somewhere in the legal system awaiting word on their fate, as well as the fate of the state budgets that will be impacted.
For Jindal, the basis of the suit is mostly procedural, according to the Associated Press. The Retired State Employees Association of Louisiana sued Jindal and other officials, claiming, among other things, that the changes were signed into law without the necessary two-thirds vote by the legislature.
Because a state office determined that implementation of the pension change would involve costs to the state, plaintiffs are arguing that such a move requires a full legislative vote, not just the super majority vote that it got.
For Raimondo, her bold moves got her featured in Time magazine but also got her named as a defendant in a lawsuit brought forth by five public employees unions. The plaintiffs claim she “manufactured” a financial crisis, according to Bloomberg, and used scare tactics and inflated numbers to justify her actions.
Currently, the courts have refused a motion to halt implementation of the treasurer’s changes, though Raimondo warns that if the suit is upheld, it would add more than $100 million to pension obligations throughout the state.
And in Florida, a state circuit judge in Tallahassee has already ruled that, in effect, the state unlawfully changed the contract it had with state workers. The case is on appeal with the Florida Supreme Court and is being fast-tracked, though no date has been set for oral arguments.
Core to all these legislative and administrative changes – and the lawsuits that have been filed against them – is the definition of the "contract" the state has with its workers concerning retirement and employment. Some states have written seemingly iron-clad contracts with their employees and their unions, while many have terms that are less defined, and, in theory, more flexible.
The Maryland Workplace Fraud Act of 2009 recently went into effect and clarifies that workers are considered employees unless the employer can produce documentation that the worker was brought on as an independent contractor with no obligation of benefits, according to IFA Web News.
Yet while that legislation may help define who is an employee and who is not, there are both hundreds of definitions and, at the same time, no clear guidance on a federal level as to what constitutes a retirement contract – and what does not.
As with many things in American life, when in doubt, take it to court. Lawmakers in Rhode Island, Louisiana, Florida and elsewhere have taken a stab at defining what their pension obligations are, and are convinced what they have done is legal.
Unions and others who would be adversely affected by the rules have hired lawyers, attempting to seek relieve from ever-growing attempts to restrict – and reduce – pension benefits for workers who have been government employees for a fair amount of their lives.
Expect dockets throughout the country to keep full, say many observing this trend. The Sacramento Bee wrote extensively about research conducted by Alicia H. Munnell and Laura Quimby of the Center for Retirement Research at Boston College, in which they argued that legislatures may have much leeway to alter retirement contracts, even ones that are seemingly air tight.
Both researchers warn, however, that all these issues will most likely have to work their way through the court system, and even then, they may not get resolved completely.
“In the end … the ability to modify pensions in these states hinges on when the contract is deemed to exist,” Munnell said. “States where the contract is found to exist at the time a worker is hired have little freedom to change benefits. States where the contract is found to exist at retirement have considerably more flexibility.”
Many, like Raimondo, fear that while these issues are winding their way through the courts, dozens of cities and possibly even states may fall into insolvency. At that point, the ability to pay will replace the issue of the obligation to pay.
And the issue, most likely, will still not be completely resolved.