7/26/11

Legal Challenge to Changing Pensions Could Derail Reform Efforts

The news we’re hearing out of the pension reform commission’s initial meetings demonstrates how daunting and far reaching the extent of the reforms will have to be to stave off the fiscal collapse of the state and especially our urban municipalities beginning as soon as next July. The unfunded liability totals some $7.3 billion. Mayor Allan Fung of Cranston is saying that minus “holistic” reform, Cranston’s finances will collapse in the face of the payments it will have to make beginning next year. And Scott Avedisian of Warwick is on record stating that present – not just future - retirees will have to accept less than what they’ve been getting each month from the state.

As a backdrop, at the moment, to these deliberations the public employee unions and the state are locked in a legal battle over recent changes to the pension system that the unions have taken the state to court over. The unions contend that modest changes made by the General Assembly during the Carcieri administration affecting current workers - increasing the age of eligibility, reducing benefits and modifying cost of living allowances – are illegal under the principle that a pension is a contractual right that the state cannot alter or void. The state is asserting that a contractual relationship does not exist under RI law and is asking for the lawsuit to be thrown out. The judge in the case, Sarah Taft-Carter, heard oral arguments on Monday and will announce her decision in September.

That’s just when the General Assembly should be meeting in special session to consider the recommendations of the pension advisory board led by General Treasurer Gina Raimondo. Should the judge decide that a contractual relationship does exist between a state worker and his/her promised pension package, and the General Assembly was at fault in modifying what is indeed a binding contract, we will find ourselves in the middle of a perfect storm and serious pension reform will be all but dead. Politicians would like nothing better than to punt on true pension reform, and if the legal interpretation says “hands off” to them, they will walk away as fast as they can.

I assume the state can contest the judge’s decision and continue to pursue legal relief all the way to the U.S. Supreme Court but that will take time and that’s the one thing we don’t have.

In the meantime the only solution might be - barring declaring state insolvency - to refinance the system, which is just what the unions want. Or try to sell the pension debt to the owners of Twin River (not that they have expressed any interest in such a scheme) and thereby free them from paying sixty cents on a every losing dollar to the state.

Let’s keep our fingers crossed that Judge Carter-Taft rules otherwise.