Pension Lawsuit Primer

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.