State Pension Litigation Update, August 2013
NEW STATE UPDATES BELOW: Michigan, Missouri
Williams Report: Pension News Update
Understanding the Legal Limits on Public Pension Reform, Amy Monahan, American Enterprise Institute, May 2013.
State Budget Solutions released a report in August 2012 finding that state pension liabilities represent trillions of dollars of unfunded state debt. The U.S. Census Bureau, Government Accountability Office, Federal Reserve Bank of Cleveland, and Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School detail the long-term chance of failure of the public pension system and the resulting state government fiscal crisis in a May 2012 report. Additional resources are available at the end of this update.
In attempts to reign in the costs of pensions, state lawmakers legislate pension reform. Challengers to those reforms often bring suit, alleging violations of state law, contracts, and the Constitution. Lawsuits also arise regarding the investment of pension funds, involving fiduciary duties of private investment firms as well as oversight liability of governments. As pension reform becomes more crucial to the fiscal solvency of the states, more litigation is inevitable.
Taylor v. City of Gadsden
Facts: The retirement system for firefighters for the city of Gadsden, Alabama, was folded into the state pension system in 2002. In 2011, the Alabama Legislature passed a law that increased employee contributions to the state retirement fund. For firefighters, the contribution rates increased from 6 percent to 8.5 percent by 2012. Plaintiff Taylor, a Gadsden firefighter, sued the city for violating his contract.
Issue: Does a city's implementation of state law increasing pension contributions of covered state employees violated state and/or federal contract law when the city had a prior contract with the now-covered state employee?
Status: Pending; Motion to dismiss denied on 02/23/2012.
Source: Laura and John Arnold Foundation Quarterly Pension Litigation Summary, April 2013
Wood v. Retirement System of Alabama
Facts: In 2011, the Alabama Legislature passed a law that increased employee contributions to the state retirement fund. For judges, the contribution rates increased from 6 percent to to 8.5 percent. Mobile County Circuit Judge James Wood sued the state alleging that the pension reform violated the state constitution by decreasing the pay of a judge during his time in office.
Issue: Is a pension reform that increases pension contribution rates of state judges lower their compensation in a way violative of the Alabama constitution?
Status: Pending; filed 06/01/2012.
Sources: Laura and John Arnold Foundation Quarterly Pension Litigation Summary, April 2013; AlabamaNews.net
San Jose Police Officers' Association v. City of San Jose
Facts: While negotiating with the police officer union in early 2012, San Jose City Council approved a ballot measure put before city voters in June 2012 that gives current city employees a choice to contribute more to their pension plan or take a lower pension and requires any new hires to contribute half of their pension costs. The measure passed with 70 percent voter approval.
Issue: Did the city sufficiently bargain with the union, as required by labor law, before putting the issue before the voters?
Status: Filed in state Superior Court in Santa Clare County on 4/29/2013.
Source: CBS News; San Jose Inside
Facts: Governor Jerry Brown signed the State's Public Employees Pension Reform Act into law in September 2012. The law, effective January 1, 2013, requires that all new government employees pay 50 percent of their pension costs and the retirement age was raised. The law also altered the pension calculation for current employees.
Issue: Can the state alter collective bargaining agreements with government employees? Does the relationship that exists between current employees and the state regarding employee pensions constitute a contract?
Status: Several suits were filed in multiple jurisdictions in late 2012 and early 2013. We will report on the individual cases and issues as they are adjudicated.
Source: Los Angeles Times
CalPERS sues the city of Compton, California, filed October 30, 2012 in Superior Court in Sacramento County ISSUE: Whether the city of Compton is required to make $1.99 million in pension contributions and $674,000 in health benefit contributions after failing to make these payments since September 21, 2012.
State can charge retirees premiums for their health care benefits according to 7th Judicial Circuit in Illinois. PLANSPONSOR.com. March 22, 2013.
SEC Charges Illinois for Misleading Pension Disclosures. Filed 3.11.13. The Securities Exchange (SEC) has charged Illinois with securities fraud. The SEC alleges that the state misled municipal bond investors by failing to disclose that its plans "significantly underfunded" the state pension plan and increased risk. The SEC order instituting settled administrative proceedings against Illinois shows that the pension contribution schedule was insufficient to cover all costs and severely backloaded payments to a future date. In particular, the effects of pension holidays and other changes made to the funding plan in 2005 were not properly disclosed to investors. March 11, 2013.
The Chicago Teachers Pension Fund notified teachers who retired between June 2000 and August 2004, who were paid on a regular school calendar, that they may have been overpaid because their pensions were calculated differently than the Chicago Board of Education felt they should be. After seven years of litigation following a suit filed in 2004, CTPF accepted a settlement agreement on December 6, 2012 allowing for the recalculation of pensions. In addition to recalculations, the Board of Education will not seek overpayments from anyone who retired in 2000 to 2012.
Chicago Teachers Union v. Chicago Public Schools filed Wednesday, 10.31.12 ISSUE: Whether the a law passed by the Illinois General Assembly barring Chicago Public School teachers from participating in the public pension plan after going on leave to work for the Chicago Teachers Union is unconstitutional. The effect of the law prior to appeal was to allow labor union leaders to collect public pension benefits based on significantly higher union salaries.
Illinois reported that it owes $83 billion to its five public pension funds. Under new Governmental Account Standards Board and Moody's Investment Services requirements, the state's pension debt will more than double.
Board of Education of Chicago v. Public School Teachers' Pension & Retirement Fund filed January 2005 ISSUE: Whether the Board of Education violated its legal duty under the Illinois Pension Code submitting a contribution that was $40,635,883 short of the requirement with unilateral authority. PENDING: Currently in procedural battle over whether the Board must redraft its complaint to name all 3,400 teachers as defendants, meaning they must find and serve each one with a copy of the suit. (10.12.11). Oral arguments are scheduled August 2, 2012.
Retired State Employees Association v. State
Facts: House Bill No. 61 created a cash balance retirement plan for new state employees. The bill was passed by a majority vote on the House floor after the Speaker of the House determined that only a majority vote was required. The Louisiana constitution requires a two-thirds supermajority vote for changes to the "[b]enefit provisions for members of any public retirement system, plan, or fund" that have an "actuarial cost." The State argues that the bill created a new plan for new members and did not alter the current plan for the current "retirees" (as opposed to "members") and therefore, did not require a two-thirds supermajority. Furthermore, the state argues that the actuarial note of the legislative auditor is not the sole fiscal advisor for the state.
Issues: Did House Bill No. 61 create a new plan that is separate from the current retirement system, such that passing the plan by less than a supermajority does not violate the Louisiana Constitution? Is the legislative auditor the only valid determiner of actual cost of a piece of legislation? [N.B.: This is not a question of the legality of the cash balance plan itself, but rather a legislative procedural question.]
Holding: House Bill No. 61 was never enacted because the House did not have the required two-thirds votes to pass the bill. The cash-balance plan, because it alters the current retirement system and has an actuarial cost, as determined by the legislative auditor, can only become law if it receives two-thirds of all votes in both houses of the legislature.
Status: State Supreme Court struck down House Bill No. 61 on 6/28/2013.
Sources: Supreme Court of Louisiana; Times-Picayune
Maine Association of Retirees v. Maine Public Employee Retirement System
Facts: In June 2011 the state legislature approved a pension reform measure that would eliminate cost-of-living (COLA) adjustments for retired state employees and public school teachers for three years and thereafter reduce the adjustments to three percent on the first $20,000 of a retirees' pension. Prior to the change, the retirement system was authorized to grant COLA of up to four percent per year. The retiree association plaintiff, later joined by three public employee unions, sued the retirement system to stop the adjustments and to pay COLA retroactively.
Issue: Was there a contract between the state retirement system and retirees regarding their retirement benefits, and if there is, has the state violated that contract by altering COLA? Alternatively, is the elimination of COLA an unlawful taking without just compensation?
Holding: Federal District Court Judge George Z. Singal dismissed the case in summary judgment, determining that plaintiffs were unable to show a violation of a contract.
Status: Dismissed by summary judgment 6/23/2013.
Sources: U.S. District Court; Bangor Daily News
In re City of Detroit, Michigan
Facts: With the power granted under Michigan's emergency manager law, Governor Rick Snyder authorized Kevyn Orr to file for Chapter 9 federal bankruptcy protection on behalf of the city of Detroit. Detroit claims it is $18 billion in debt that it cannot repay. Among the city's creditors are the city employees' pension boards.
Procedural History: Prior to the federal bankruptcy filing, the pension boards filed for a restraining order in state court against Governor Snyder to stop him from authorizing Detroit's bankruptcy filing. The state Circuit Court granted the temporary restraining order and ruled that the federal bankruptcy filing was improper because it violates the Michigan constitution provision which prohibits the reduction of pension benefits. The Michigan Attorney General appealed the case on behalf of the state to the Michigan Court of Appeals. The Michigan Court of Appeals granted a stay on the lower court ruling that would have blocked the bankruptcy filing. The Attorney General also moved in bankruptcy court for a confirmation of protection, which would stay all state suits against Detroit.
Issue: Can state lawsuits against the debtor city continue after the city has filed for Chapter 9 bankruptcy protection?
Holding: The federal bankruptcy court ordered a stay of all suits against Detroit and claimed jurisdiction over all debtor claims. In turn, the Michigan Court of Appeals closed the suits against Detroit, pending the lifting of the federal bankruptcy court's stay.
Status: All state suits dismissed and ordered under federal bankruptcy court jurisdiction 07/25/2013. Case ongoing.
Note: State Budget Solutions estimates the city's pension funding gap to be even larger than the bankruptcy filing states. For more information, click here.
Sources: Bankruptcy Court's Detroit Bankruptcy Site; All other sources are in-line for better references.
Firemen's Retirement System of St. Louis Board of Trustees v. City of St. Louis
Facts: The St. Louis Board of Aldermen passed several reforms of the city's firefighter pension plan, some of which were halted by preliminary injunction. The city government eventually amended the earlier changes, based on the court's preliminary injunction orders. The amendment at issue restored some benefits to vested firefighters, but also created another retirement system with fewer benefits that would apply to new firefighters and firefighters with less than 20 years on the job. The new system would also have a new board of trustees which would give city government the majority of members on the board, rather than a majority of current and retired firefighters of the current trustee board.
Issues: Can the city of St. Louis adopt a pension system without enabling legislation? Can St. Louis, rather than the State of Missouri, terminate the current trustee system and replace it, and if yes, with what level of discretion? Per the latest amendment, can the city, instead, create a dual-plan system? Finally, does a change to the current system for non-vested firefighters constitute an impairment of vested right or violation of contract law?
Holding: The court determined that the St. Louis Board of Aldermen are permitted to change the pension plans of city employees without additional enacting legislation, since it is a chartered city with "home rule," but that the city does not have absolute discretion. The enacting legislation establishing the pension plan allows for alterations without further enacting legislation being necessary. Putting aside the issues of the earlier reforms, the currently-established ordinance regarding the dual plan system is permissible. The earlier reforms that reduced benefits for vested retirees and their families were a violation of contract law principles. The current reform does not suffer the same flaw.
Status: Order in favor of city upholding pension reforms 6/3/2013.
Notes: For a full review of the lucrative firefighter benefits, please read this special report from the St. Louis Post-Dispatch.
Sources: Missouri Circuit Court; St. Louis Post-Dispatch; Dannna McKitrick, P.C.
Professional Firefighters of New Hampshire et. al. v. State, et. al. (Hillsborough County)
Facts: The New Hampshire Retirement System (NHRS) has two classes of employees and pays out pension benefits calculated by standards written into state statute RSA 100-A. In 2011, the state legislature passed HB 2 which made several changes to the state employee pension system: 1) redefining "earnable compensation"; 2) increasing the number of years to calculate "average final compensation"; 3) adding a cap on benefits; 4) altered minimum age requirements of Group II members; and 5) repealed accidental disability exception for Group II members who already retired. Plaintiffs firefighters union and other others public employee unions sued the state and the state retirement system alleging a contract violation for those members of NHRS who had permanent employment or had retired by January 1, 2012.
Issue: Does RSA 100-A create a contract between the state and public employees, and if it does, when does that contract vest, and has that contract been violated by HB 2?
Holding: RSA 100-A creates a contract that vests upon reaching permanent employee status, so long as the state employee reaches the minimum requirements for age and service. Summary judgment granted on this issue. The court did not reach a decision on the claims of contract impairment or violation of the Takings Clause.
Status: Partial Summary judgment reached 05/24/2013. Parties will continue litigation on the outstanding claims.
Note: This ruling creates a county court split with the Merrimack County Superior Court, though a state Supreme Court case was decided between these two Superior Court decisions.
Sources: Seacoast Online; Molan, Milner & Krupski, PLLC: Cases to Follow
American Federation of Teachers v. State of New Hampshire filed 7.30.12. ISSUE: Whether the legislature violated the Contracts Clause, Takings Clause, Due Process Clause, and the state's Contracts Clause in HB 653 and 1645 recalculating cost of living adjustments and redefined compensation. DECLINED INTERLOCUTORY TRANSFER on 9.26.2012. The parties' briefs were due on December 14, 2012. Supplemental briefs were due April 5, 2013. Federal claims dropped on March 15, 2013, pending the outcome of a similar case before the state supreme court.
Professional Firefighters of NH, et. al., v. state of New Hampshire filed 2.13.12 ISSUE: Whether the legislature may withdraw more from the paychecks of veteran public employees to support pension reform. HOLDING: Merrimack County Superior Court held that it is illegal for the legislature to increase contributions for all employees who had worked for at least 10 years. The ruling declared legal the Legislature's ability to affect new hires, including increasing the retirement age and reducing their ability to pad the future pension amounts. At this point, it is unclear whether the Attorney General will appeal.
Empire Center for New York State Policy v. New York State Teachers' Retirement System
Facts: The Empire Center, a non-profit group, filed a Freedom of Information Law (FOIL) request for the names of all retirees in the State Teachers' Retirement System, along with the corresponding information for each retiree. Respondent argues that it is not required to provide that information under the exemptions of Public Officers Law § 89 (7). Empire Center argues that the respondent may hold back the addresses and other exempt information but furnish the remainder.
Issue: Must a state retirement system disclose the retiree names and corresponding information under FOIL, or is that information exempt under Public Officers Law § 89 (7)?
Holding: The Supreme Court, Appellate Division held that lower courts were correct in allowing the retirement system respondent to claim the FOIL exemption.
Status: The Court of Appeals granted Empire Center a review of its FOIL cases on 6/27/2013.
Additional Notes: This is one of a series of FOIL cases by Empire Center to obtain this information.
The Empire Center has been supported by amici Albany Times Union, Auburn Citizen, Buffalo News, Gannett Co. Inc., Hearst Corp., New York Daily News, New York News Publishers Association, New York Post, New York Press Association, New York Times Co., Newsday LLC and the Observer-Dispatch.
Sources: Empire Center; Appellate Division; Appellate Division;
Sunyak v. City of Cincinnati, consolidated with Harmon et al. v. City of Cincinnati filed 07.01.11. ISSUE: Plaintiffs contended the changes violated the U.S. Contracts Clause, substantive due process, procedural due process, the Takings Clause, the Ohio Contracts Clause, and Ohio common law causes of action for breach of contract and breach of fiduciary duty. CONSOLIDATED: Amended complaint due by October 1, 2012. Discovery is due by March 1, 2013. Motions due by April 1, 2013. Final pretrial conference is scheduled for September 2013 and jury trial in October 2013.
State of Rhode Island and Rhode Island Public Employees' Retiree Coalition, et. al., v. Lincoln Chafee and Gina Raimondo filed June 22, 2012 ISSUE: Whether the Rhode Island Retirement Security Act violates the state Constitution by suspending COLAs until the pension system is 80% funding and by moving most employees to a hybrid pension plan. The Plaintiffs also allege that State Treasurer, Gina Raimondo, created a "manufactured crisis" in 2011 by dropping the pension fund's investment outlook from 8.25% to 7.5%, sharply raising the contribution made by taxpayers. In an effort to stop pension reform beginning July 1, 2012, unions sued in Superior Court for a temporary restraining order to suspend the cessation of cost-of-living adjustments, raising of the retirement age, lowering the assumed rate of return on pension funds to 7.5% from 8.25%, and moving state employees onto a hybrid pension benefit plan. HOLDING: Superior Court Judge Sarah Taft-Carter denied the request just hours after unions launched three coordinated lawsuits on behalf of 30,000 state employees, retirees, and emergency responders. Defendants filed OBJECTION TO MOTION TO P'S CONSOLIDATE July 16, 2012, in to object to Plaintiff's Motion to Consolidate. Defendant's asked the Court to consolidate for purposes of discovery only and reserve judgment on whether the case should be consolidated for purposes of trial because consolidation is premature and therefore inappropriate. RECUSAL CONCERNS: On October 22, 2012, Judge Taft-Carter held a conference with all attorneys to address the State's concerns that there was a conflict of interest. The Judge issued a bench decision finding that she is not recusing herself and that all of the pension cases are assigned to her. The State's MOTION TO DISMISS scheduled for October 30, 2012 was moved to December 7, 2012. STATE REQUESTS HEARING BEFORE SUPREME COURT on November 19, 2012, to make a decision on whether to let Judge Taft-Carter to continue hearing the pension case, based on claims of conflict of interest because her son is a state trooper and mother receives benefits as the widow of the former Mayor of Cranston. SUPREME COURT DENIED REMOVAL of Judge Taft-Carter from presiding over the case, noting a substantial public interest in the pension case "requiring the resolution of complex questions of constitutional law, the speedy, effective, and efficient determination of which is of incalculable importance to all of the state's citizens." December 6, 2012. Both parties to the lawsuit agreed to MEDIATION to attempt to resolve issue and reach a settlement. The parties were referred to the Federal Mediation and Conciliation Service in Washington, D.C.; A progress report is due to Judge Taft-Carter by February 1, 2013. December 18, 2012.
U.S. District Judge John McBryde sent litigation over the city of Fort Worth's pension changes back to State District Court in Fort Worth, where the city initiated it. Two officers representing the interests of the Fort Worth Police Officers Association had filed suit in U.S. District Court. On Oct. 23, the City Council approved significant cuts in employees' pension benefits in an effort to close the plan's fast-growing $748 million unfunded gap. The same day, the city filed its own suit in state District Court, asking a judge to declare the pension cuts legal under the state constitution.
The city's suit also asked the judge to declare that a Police Officers Association vote - in which members voted overwhelmingly to raise their pension contributions and leave more money in the retirement fund in exchange for retaining their benefits formula, was illegal because it didn't include firefighters and general employees. The council later approved the payment of $100,000 to the Fort Worth law firm Kelly, Hart & Hallman to represent it in the litigation. Under the pension changes, the city will reduce the multiplier used in calculating benefits, raise the number of years used in figuring base retirement pay, and eliminate overtime in pension calculations.
Washington Federation of State Employees v. state of Washington & Governor Christine Gregoire filed 10.12.11 ISSUE: Whether the legislature violated constitutional rights of equal protection and freedom from contract impairment when it ended automatic COLA for retirees in two of Washington's older pension plans in HB 2021. The bill also raised the minimum benefit for older retirees if they meet certain service and year requirements. FINAL DECISION, PENDING FINAL ORDER: Thurston County Superior Court Judge Chris Wickham ruled that the legislature acted illegally when it eliminated annual increases in benefits to retirees in the PERS 1 and TRS 1 systems. The decision effects current and future retirees, but excludes workers who left government service before 1995. The law was intended to save the general fund $415 million from 2012-13 and another $525 million in 2013-15. It was also expected to reduce the pension plans' unfunded liability by $3.8 billion.