PENSION REFORM

R.I.’s needed pension cuts pass legal test

COURTESY WIKIMEDIA COMMONS
IN RHODE ISLAND, a pension-reform plan hailed as a national model is being challenged as unconstitutional, says Harvard professor and Bloomberg News Columnist Noah Feldman.
Posted 12/6/12

BOSTON - From Athens to Rome to Providence, the painful truth about pensions is the same: Unfunded liabilities need to be reformed, and unions don’t like it.

The difference: Europeans go to the streets when they are unhappy, and Americans go to the courts. In Rhode Island, a pension-reform plan hailed as a national model is being challenged as unconstitutional. Striking down reform would be a disastrous move -- not only for budgets but also for constitutional governance itself.

It’s easy to sympathize with workers’ desire not to have their pensions touched. Many have built decades of expectations on the basis of generous pension plans, and it seems unfair that they should lose out because benefits negotiated on their behalf turn out to be fiscally unsustainable. Moreover, employees, including public employees, think of themselves as protected by contracts that specify those benefits -- and according to the federal and many state constitutions, states are not supposed to make laws impairing the obligation of contracts.

Yet the equation of benefits with inviolable contractual rights is too hasty, both legally and morally. As a legal matter, many public-pension plans are in fact created by statute, and it is well established that what a legislature may do by law, it may also undo. Most of the Rhode Island pension plans are clearly statutory.

Fiscal viability

Even when benefits are created by contract, the states’ obligation to respect those contracts has long been interpreted to allow for them to be altered or even eliminated when public necessity demands it and the modification is deemed reasonable. The looming fiscal crisis in Rhode Island -- and in many other states and cities -- certainly satisfies the condition of necessity. Changes to the age of retirement and the mix of public and private guarantees are reasonable by any measure. In the end, the point of modifying pension plans is to preserve the fiscal viability of the government, which is much better for its creditors than seeing it collapse under the burden of obligations it cannot meet.

The moral justification for this legal rule is straightforward: The government creates property rights, and so the government can modify those rights when necessary. The same principle underlies taxes, which Supreme Court Justice Oliver Wendell Holmes Jr. memorably called the bill for civilization. The government may take some of the money I’ve earned because without its protection I wouldn’t be able to keep it -- or earn it in the first place.

It’s certainly unfair that some people get penalized when the government finds it has overreached, and it’s especially painful when the victims are working class rather than financiers. But the same principle that allowed the government to pay Chrysler’s senior secured creditors 29 cents on the dollar applies equally to unions. In a pinch, the government may curtail some property rights to preserve the health of the whole system. No one ever likes it -- and everyone, regardless of political preferences, makes the same conservative property argument against it.

So what protection does anyone have against a government that runs into crises and has to resolve them by spreading the pain around? The answer, bluntly, is democracy. If debt-holding hedge-fund managers didn’t like the Barack Obama administration’s Chrysler strategy, they could try to take him out of office (and, believe me, they did). If unions ultimately don’t accept that pension reform is necessary to save the governments on whom they rely for their jobs, they can go after the politicians who designed it. To this extent, the Europeans have it right: The proper response to policies you don’t like is to protest, not to sue.

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JohnPella

I'm sorry professor I don't agree with you. Are you saying all a legislature has to do is pass a law or repeal one to void an element of a contract?

Thursday, December 6, 2012 | Report this
Ken C

Hi, John. I think the answer is yes - with conditions. All the legislature has to do is pass and/or repeal a law to repeal or void elements in a contract. That said; however, the decision to alter or pass a law must be on sound and valid reasoning. The reason the legislature made the change must pass legal scrutiny. If the reason the legislature changed the contract was not strong enough to cause the change, then that new law would be struck down because it wasn't based on a real need. For example, if the legislature changed the pension because they thought it would attract yellow butterflies to the state, you can bet that the change would be struct down in court and the pension would be restored. In the case of Rhode Island, the state didn't have enough revenue to sustain the original contract. That is considered a valid reason to alter the contract with the expectation that the system will now survive in the long run. Basically, you are allowed to correct fatal decisions, but not whimsical ones.

Friday, December 7, 2012 | Report this
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