US Court of Appeals Bats’em Down
Pay attention to the history because getting there is half the fun.
Cranston, Rhode Island (RI), firefighters have been covered by some type of municipal pension system since 1936.
In the 90’s it was determined that the city could no longer afford the benefit, indeed it was a fiscally sinking ship.
The solution was to dump new hires (and some others) into the state system.
The state system provided lesser benefits than the old city system but the great god of political action seemed to fix that.
The RI legislature passed a bill allowing these firefighters to have better benefits than other pension system members while having them pay a 10% salary contribution rather than the usual 7%.
Life was good until.
2011 Pension Reform
By 2011 the state system was also tanking because of “dire underfunding” and the god of political action took back his earlier gift when the RI legislature yanked the rug out with a pension reform bill.
The changes: “added a minimum retirement age of fifty-five where previously none had existed, changed the years of minimum service from twenty to twenty-five, reduced the pension accrual percentage per credited year of service, and made the calculation for workers’ final compensation less favorable.”
Cranston firefighters and police unions did not agree to this settlement thus paving the way for a federal lawsuit contesting the 2011 reduction of benefits.
The US District Court threw out their suit and now the Court of Appeals has, too.
Why?
The Cranston firefighters “assert that the legislation infringed upon the rights of the Unions’ members under the Contracts, Due Process, and Takings Clauses of the United States Constitution. ”
The Appeals Court was having none of that.
The Court disagrees that legislation is the same as a contract and then goes on to discuss other similar cases where plaintiffs have failed, often with a stronger set of facts, to win the contract argument.
The take home: you may think you have a retirement contract but the courts do not.
Cranston firefighters also raised the issue of the apparent sanctity of the collective bargaining agreement but here too the Court was unpersuaded.
The judges determined that plaintiffs failed to adequately describe the contract harm inflicted and that state court was the proper forum for such cases anyway.
The Value of Contributions
Here’s a stunner.
Not only does the Court demolish contract assertions, time and again they also state that the member’s rights extend to a) simply the value of their own contributions or b) those contributions with interest.
“Importantly, there is no allegation that the value of the benefits as modified falls below the value of the respective employees’ contributions to the plan.”
The Court is saying that benefits can be lowered to a point that equals the value of a member’s contributions, a frightening specter, for sure.
We call that some really shitty case law.
Thank you, Cranston.
How to F**kup Your Pension
Of course, the real goal is to never get to a point where a pension bailout is necessary.
Many of these cases develop because of over-generous benefits, poor judgement, incorrect assumptions and plain old greed.
Guaranteed ways to screw it up:
- Allow overly optimistic forecasts on investment returns or asset valuations so you can pass an enhancement.
- Cut deals with elected officials and administrators to allow municipalities to skip required payments to the system because of rosy returns or fund balances. (San Diego)
- Allow average final compensation to include overtime pay, vacation pay, known as pension spiking. (New York)
- Lock in an absurd mandatory interest rate due on investment earnings in a deferred retirement plan. (Dallas)
- Allow frivolous service-connected disability retirements which bleed the system dry. (Fairfax pre-1996)
- Have a pension board agreeing to knowingly risky or even absurd investments. (Dallas)
In short, any action which even has a whiff of “gaming the system” is nothing but trouble.
And, where politics are concerned, it’s not what you think but rather what the public thinks.
Safer Pensions
In the current and forecasted pension climate if you have a defined benefit which:
- is payable at 25 years at 50% of regular pay
- has no minimum age
- is based on 36 months of regular or base pay only
- has a cost of living adjustment on the total benefit,
you are well positioned politically and financially and you should protect what you have created.
Getting greedy is also getting stupid.
