AGA Today
Once Safe,
Public Pensions Are Now Facing Cuts
By
MARY WILLIAMS WALSH
The New York Times
November 6, 2006
After losing a leg in the line of duty, Dan Toneck, a San Diego police
officer, spent nearly a year in rehabilitation before returning to work,
doing his job for another five years with an artificial limb.
Mr. Toneck, 37, was granted a disability retirement last year after 16
years on the job. Some of his fellow officers wept as he left
headquarters for the last time.
Then, 10 months later, the impossible happened. San Diego cut his
pension by about 10 percent, along with those of about 180 other
disabled city retirees. “They’re trying to pay the bills on the backs of
the employees,” Mr. Toneck said.
Across the country, government workers’ pensions are protected by
guarantees even stouter than those on pensions in the private sector.
The legal promises, often backed up by union contracts, cover more than
15 million people.
Years of supporting court interpretations have enshrined the view that
once a public employee has earned a pension, no one can take it away.
Even during New York City’s fiscal crisis 30 years ago, no existing
pension promises were reduced.
But now a number of state and local governments are quietly challenging
those guarantees. Financially troubled San Diego is the highest-profile
example, but a handful of states, cities and smaller government bodies
have also found ways to scale back existing promises and even shrink
some current payments.
While still only scattered cases, these examples may be an early warning
sign of what could be coming elsewhere. As local officials take stock of
unexpectedly large obligations to retired public workers, some are
starting to question whether service cuts, sales of government property
and politically acceptable tax increases can ever go far enough to bring
things into balance.
“This is a real-life problem,” said Paul S. Maco, a partner in the law
firm of Vinson & Elkins who advises municipalities on the disclosure of
these obligations.
Mr. Toneck said that years ago, while he was still on the police force,
he saw signs that San Diego was cutting corners. He recalled having to
go to Kmart to buy jumper cables for his squad car. He was not surprised
to learn the city had shortchanged the municipal pension fund. But he
never dreamed his pension could be reduced.
“It was guaranteed, written in stone — when I retire, I make this much
and they’re not going to be able to touch that,” he said.
His pension was set at about $35,000 a year. But last May, he received a
letter saying he would start getting about $31,000 instead.
He
and the others on disability pensions fell victim to an ambiguously
written pension statute that lawyers noticed while combing through San
Diego’s financial records in the wake of a pension scandal. But there do
not have to be accusations of wrongdoing for a government to start
looking into whether its obligations to retirees can be reduced.
Some places, including Oregon, Rhode Island, Milwaukee County and
several cities and towns in Texas, have already cut public workers’
pensions on the basic argument that their pension funds had gone
disastrously out of balance. Whether because of investment losses,
faulty calculations or other factors, these places have declared that
they can no longer sustain a level of benefits that had looked
affordable just a few years ago.
Beyond the sheer political difficulty of removing an existing benefit,
an array of legal guarantees — some in statutes, some in state
constitutions, some in city charters — were supposed to prevent such
reversals. But lawyers have been finding chinks in the armor.
In
Texas, the pension guarantee in the state constitution has an unusual
clause, giving towns and cities the chance to hold referendums on
whether to opt out.
Voters in Houston made that choice after learning that pension
sweeteners issued there in 2001 were allowing some people to retire in
their 40s. Others, who participated in a special program that let them
simultaneously work and collect pension money in high-interest accounts,
got an even better deal, sometimes walking away with one-time payments
of a million dollars or more on top of their regular pensions. The city
raised the eligibility requirements for retirement and cut some of the
biggest sweeteners.
Oregon rolled back $6 billion worth of public pensions in 2003, but the
cuts have been snarled in legal challenges. In October, a federal
appellate panel affirmed that Oregon could stop paying a guaranteed rate
of 8 percent a year to participants with individual accounts. But
another measure, freezing some retirees’ cost-of-living adjustments, is
still unresolved.
“Retirees have been in a state of turmoil,” said Gregory A. Hartman, a
Portland lawyer representing some of them. “They don’t know what their
rights are. They don’t know what they’re entitled to.”
In
Rhode Island, state workers’ pensions take an unusually long time to
vest, so the legislature was able to cut the planned pensions of
everyone with fewer than 10 years of service, about 11,300 people.
In
Wisconsin, Milwaukee County has tried to avoid legal battles by working
with its eight public employees’ unions after a pension scandal broke in
2001. A recall election was held and angry voters ousted seven county
supervisors from office after learning they had jacked up pensions,
including their own.
“This was a totally corrupt, venal deal by a bunch of politicians and
their friends who figured out how to loot the treasury,” said Roger H.
Quindel, a county supervisor.
Even so, Milwaukee County has been able to make only marginal trims so
far. Money is draining out of the pension fund so fast that the county
has been contemplating the sale of some parks and an airport, along with
cuts in government services. And it plans to ask for pension cuts when
its labor contracts come up for renegotiation in January.
“We won’t survive if we don’t,” Mr. Quindel said.
Wisconsin’s state constitution does not specifically protect public
pensions, but the county’s lawyers have warned that a constitutional
protection of property rights may cover pensions. The supervisors asked
whether the county could shed some of its pension obligations by
declaring bankruptcy, as airlines, steel companies and others have
sometimes done. The lawyers said no.
In
the private sector, a uniform federal pension law bars companies from
reducing pensions that employees have already earned. Since pensions are
built up over time, this means that if a company freezes or reduces the
growth of benefits at some point, workers will earn smaller benefits
going forward, but they cannot be stripped of anything they earned
before the change. The only way around that rule today requires a
bankruptcy judge to approve a default.
In
the public sector, the protections often go further. About half of the
50 states have constitutional or statutory guarantees, said Robert D.
Klausner, a lawyer in Plantation, Fla., who represents state and
municipal pension plans in more than 20 states. “The day you’re hired,
your benefits are locked in at a minimum level,” he said. If a
government wants to cut pensions, it cannot apply the cuts to people
already in the work force, as a corporation can. It can only apply them
to new hires, he said.
Governments are also studying the guarantees on retiree health benefits
because of a new accounting rule that is now requiring them to
calculate, for the first time, the total value of the health benefits
they have promised to retirees.
The numbers now being disclosed are daunting. Mercer Human Resource
Consulting estimates that when all the calculations are done, the
nation’s states and cities will find they have promised a total of about
$1.4 trillion, said Derek Guyton, a senior consultant.
Little, if any, money has been set aside to fulfill these obligations.
Mr. Maco, the Vinson & Elkins lawyer, said he feared that many towns and
cities, particularly in places like upstate New York and along the Great
Lakes, were about to discover that years of factory closings and job
losses had eroded their tax bases so much that they had no realistic way
to pay their full bills.
“The steel industry can shut down and close its plants, but that’s hard
for local governments,” Mr. Maco said. After industries move away, the
retired teachers and firefighters will still be there.
Pension funds can normally operate for many years with a shortfall,
because they have investments to call upon and pensions are paid out
slowly. But health claims, with little or no money set aside to pay
them, can come due right away.
Some government agencies, like Chicago’s municipal bus and rail
authority, have set up a potentially explosive situation by arranging
their retiree health claims to be paid directly out of their pension
funds. “The taxpayers need to understand the seriousness of our
situation,” said Laurence Msall, president of the Civic Federation, a
nonpartisan research group in Chicago. “It’s not a far-off crisis.”
San Diego’s municipal pension fund was also responsible for retiree
health care. But when the city’s pension scandal broke, officials
separated the health obligations.
“Now we’re looking at a $3.1 billion debt, and $1.4 billion is health
and $1.7 billion is pension,” said Michael Aguirre, the city’s
independent attorney.
He
is now in court, leading an unusually aggressive initiative to cut the
city’s pension obligations, arguing that benefits granted in 1996 and
2002 were issued illegally and must be annulled.
California law protects public pensions, but Mr. Aguirre is arguing that
those protections conflict with other laws that govern the actions of
public officials, which he says San Diego pension trustees violated. If
the court agrees with him, the benefits owed to San Diego’s roughly
15,000 city workers and retirees could go back to the level before the
1996 increase — a total reduction of some $500 million to $700 million.
Mr. Toneck, the disabled San Diego police officer, is not directly
affected by Mr. Aguirre’s case. He has petitioned the San Diego city
council to reverse the cut in his pension, arguing that workers disabled
on the job are the last people who should pay for a mistake that was
caused by an ambiguity in the law.
The council has referred his petition to Mr. Aguirre, who is busy with
the broader case.
Meanwhile, Mr. Aguirre said San Diego still had not developed a plan for
paying all of its obligations, whatever the courts ultimately rule. He
said he might ultimately have to try bankruptcy court.
“There’s no good option,” he said. “It’s only painful.”