On Friday, the long-anticipated lawsuits against the 2011 Rhode Island Retirement Security Act (the pension changes passed by the Rhode Island General Assembly and signed by Governor Chafee last fall) were filed on behalf of those impacted by the changes. We believe that the State of Rhode Island has a legal and a moral obligation to the active and retired teacher, state and municipal workers. This article will outline the background, thinking and rationale behind the legal arguments that will be pursued.
The basic legal argument included three counts that assert that the state violated the Rhode Island Constitution by contravening contract rights, due process rights, and the takings clause (relating to property rights) of some or all vested employees and retirees.
While it is possible the various lawsuits will be consolidated, for legal procedural reasons there are currently three lawsuits involving the rights of vested active employees, represented by a coalition of unions including the National Education Association Rhode Island, RI AFSCME Council 94, RI Federation of Teachers and Health Professionals, Laborers’ International, National Association of Government Employees, and the International Brotherhood of Police Officers, among others, and several attorneys.
A lawsuit covering retirees was filed separately at the same time, and falls under the umbrella of the RI Public Employees’ Retiree Coalition, a group formed by the retired groups from NEARI, RI AFSCME-Council 94, RIFTHP, RI Retired Teachers Association, RI Association of Retired Principals, RI Laborers’ Retiree Council and other retirees.
The lawsuits requested an immediate temporary restraining order to stop the implementation of last fall’s changes to the state, municipal, and teacher retirement systems, which was denied, but the court did set a speedy trial date later this summer.
While we expect the lawsuit(s) at the Superior Court level to take several months, and with expected appeals even longer, the basic legal arguments can be summarized in a few key legal questions.
The first question is whether the pension benefits are contractual in nature. To date, the courts have suggested that they are, and folks covered by pensions in the state run Municipal Employee Retirement System may even remember negotiating for the specific plan that covers them. Even the benefits that are statutory in nature, such as those for teachers and state employees, should be found to meet the elements of a contractual relationship.
The next question has two parts – did the changes in the law impair the contract that a pension represents, and if so, was the impairment substantial? We believe that these are easy questions for the courts to answer in the affirmative – significant diminishment in COLA’s, benefits, formulas, and age of retirement should easily clear the “substantial impairment of benefits” standard.
The final question is where we expect the lawsuits to be grounded – and to be won by the active and retired members. Even if there is a contract, and even if the contract was substantially impaired, did the impairment serve a greater government purpose? The key subsidiary question to be answered under the “greater government purpose” standard is whether more reasonable options were available.
We believe that there were many more reasonable options available that could have significantly reduced the devastating impact the pension changes had on so many active and retired teachers, state and municipal workers. If the Court finds that there were more reasonable options not entertained and undertaken, then the State will not prevail in defending the pension changes.
The questions on reasonableness cover several areas, some in arcane areas that expert testimony will cover. They may include whether the updated mortality data used to calculate pension liabilities went too far; whether the reduction in the expected rate of return of the pension portfolio assumed too low of a rate of return; why no new revenue from the state was included to offset the potential increased costs incurred when the aforementioned changes were made to the mortality and rate of return assumptions; how the projections related to the new defined contribution portion of the new retirement plan were calculated; the decision of when COLA’s should be restored and at what level; the potential disparate impact of the changes on lower and higher paid workers and retirees; the potential disparate impact on workers with longer and shorter terms of service; the potential disparate impact on Social Security recipients and non-Social Security recipients, etc., etc.
Or, perhaps more simply, how can Rhode Island consider honoring the “moral obligation” related to the bonds issued for the now bankrupt 38 Studios before they honor the legal and moral obligations to retired and active state and municipal workers and teachers?
The intent of the above in not to argue the entire legal case in this article, but to point out that there is much room to conclude that Rhode Island elected leaders left many more reasonable options on the table. And that conclusion means that the changes made to the pension system do not stand up to legal scrutiny. Perhaps that is why the City of Providence, faced with a similar set of facts, chose to negotiate with the parties involved. Perhaps the State of Rhode Island should have negotiated with the unions in the first place. Perhaps they still should.
Excellent primer, thanks!
Serious, non-trolly question: what are some examples of the “many more reasonable options” other than reamortization?
Funny, I didn’t even mention reamortization when I listed all of these: ”The questions on reasonableness cover several areas, some in arcane areas that expert testimony will cover. They may include whether the updated mortality data used to calculate pension liabilities went too far; whether the reduction in the expected rate of return of the pension portfolio assumed too low of a rate of return; why no new revenue from the state was included to offset the potential increased costs incurred when the aforementioned changes were made to the mortality and rate of return assumptions; how the projections related to the new defined contribution portion of the new retirement plan were calculated; the decision of when COLA’s should be restored and at what level; the potential disparate impact of the changes on lower and higher paid workers and retirees; the potential disparate impact on workers with longer and shorter terms of service; the potential disparate impact on Social Security recipients and non-Social Security recipients, etc., etc.”
Right, but if all of those things are reconsidered, a new mortality data is still going to show that people are living at least somewhat longer, a new rate of return is going to be somewhere south of 8.25% and north of 7.5%, and diversion of new revenue from elsewhere in the state is figurative drop in the bucket (unless you want to hurt public employees elsewhere by taking big chunks the state government away) — so you’ve still going to have a major unfunded liability (it will still be one of the biggest in the country) — and I don’t know how you convince a judge that a half/half DC/DB plan isn’t reasonable, or that waiting to restore the system to 80% funding before COLAs return is equally as unreasonable — because they seem definitionally reasonable.
None of those things are solutions to the problem — they’re arguments about the analysis of the problem.
Actually, they are all elements to make the case that the State was not reasonable in its approach, and some also suggest more reasonable solutions. While they overlap, they are separate concepts. Remember, the State has a high hurdle to meet since it is breaking a legally enforceable contract. First, the required annual management contribution to the pension system increased by about $150 million next year in round numbers after the new mortality data and rate of return were implemented. About half was attributed to the actuarial data, and half to the rate of return. The existing plan and existing retiree benefits were then changed to reduce the next year’s contribution by about – wait for it – $150 million.
So, right off the bat, one more reasonable solution would be to restore the tax breaks given to richest Rhode Islanders just a few years ago to their prior levels, since they were given under the false pretext that they were affordable, but they weren’t since the Treasurer would argue the pension problem was both pre-existing and reasonably foreseeable. A nice Catch-22, to say the least. You can’t have your tax cuts for the wealthy without acknowledging they caused a contract to be broken with the middle class.
While the restoration of the prior tax system alone would allow most of the benefits to be restored, the reasonable longer re-amortization period, in conjunction with other changes or on a stand-alone basis, would allow the state to keep more of its commitment. A rate of return of 7.75% versus 7.5% alone erases about 1/6th of the problem, or about $25 million in the next year. And since other communities and states have dealt with similar issues in manners that were clearly more reasonable, I believe the case will be fairly straightforward. The lack of consideration of many of the other issues on the list I generated simply underscore the lack of due diligence when the legislation was crafted and approved, and a reasonable approach demands due diligence. But, as I noted, the article outlines the questions and general areas of response to be expected as the case unfolds before the courts. I’ll leave the rest to our team of attorneys and expert witnesses.
38 Studios… Looked it up. Interesting.
en.wikipedia.org/wiki/38_Studios
Slow motion train wreck meets kabuki meets consultant.
Bob, is the pension lawsuit consolidating the 2009/2010 into the lawsuit filed last Friday? Raimondo has been saying that even if the 2009/2010 changes get reversed, the next obstacle would be the 2011 changes.
The prior lawsuits are essentially on hold as the new changes overrode the first round of changes.
Yes, but winning the older lawsuit would matter to those of us who had 25 years in 2009. Teachers with 25 years of service when the 2009 changes took place could have retired in June 2012 with 28 years of service. This same teacher would have her pension calculated based on the three ( instead of five) highest years of service. The older lawsuits being overturned would matter to people in this circumstance, since they could have retired this June with a higher pension. The 2011 pension changes don’t override for those of us in this circumstance.
Winning the 2009/2010 lawsuit alone would make people in this circumstance whole,exceptfor the COLA.
Is anyone else disturbed that Gist is hiring people from Gina Raimondo’s Point Judith Capital?
Have you heard of Maura Kelly who is running for state rep. She has an MA in Education Public Policy ( a red flag right there) and is a former employee of Point Judith Capital, a company that was owned by our Treasurer Gina Raimondo, the woman who is behind ruining our pension system. This woman now has a job as “outreach officer” at the RIDE, that pays $84,000. What does an “Outreach Officer” do anyway?
I am getting so tired of these high paid carpetbaggers swooping into positions on behalf of their union-destroying, venture capitalist friends. Gist is obviously in bed with those out to not only distroy our profession, but to eliminate our benefits. Why? Because she has publically said she thinks teachers should only teach for five years.
The agenda is to make teaching a fly-by-night, low paid job. Eliminate unions, cut benefits, and you have the makings of teaching as a low paid service job.