Florida's Billion-Dollar Pension Battle?
A court order forcing Florida to forgo $1 billion it planned to take from state workers to shore up its budget is the latest sign of the difficulty of reducing government-backed retirement benefits.
Of 41 U.S. states that made significant pension changes in 2010 and 2011, at least 13 have faced court challenges, according to the National Conference of State Legislatures.
“It can be very difficult,” said Ron Snell, a senior fellow at the organization who has studied pensions. “There are many obstacles in the way of policy makers.”
States such as Florida, whose $152 billion retirement fund is the third-largest of any state, increased employee contributions and eliminated cost-of-living-adjustments to free up tax dollars. With 29 states facing a total of $47 billion in budget shortfalls next year, according to the Center on Budget and Policy Priorities, orders to repay workers may create new obstacles to solvency.
At the same time, some pensions are ailing. Investment losses left states and municipalities with $3.6 trillion in unfunded obligations, according to a 2010 study by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester. The U.S. Government Accountability Office said that report failed to account for future contributions and that its “projected exhaustion dates are thus not realistic estimates.”
State pensions in 2010 had on average only 74.6 percent of the assets they needed to cover promised benefits, according to a Bloomberg ranking. Florida had 84 percent.
This week, the state appealed Leon County Circuit Judge Jackie Fulford’s decision that blocked Republican Governor Rick Scott’s plan to buoy the budget. The changes to promised benefits violated collective-bargaining rights and were an “unconstitutional taking of private property,” the judge ruled.
The changes were intended to save $1 billion a year by requiring workers to contribute 3 percent of their pay and eliminating cost of living adjustments for those retiring after the law took effect in August.
The state’s appeal put a hold on Fulford’s order to repay workers, and lawmakers continue to work on their $70 billion budget for fiscal 2013, a spending package that anticipates savings from Scott’s plan. It is scheduled for a final vote tomorrow, the last day of the annual legislative session.
The judge’s decision “is not going to affect this year’s budget,” said Representative Will Weatherford, a Wesley Chapel Republican. “We feel very confident that we’ll win later on down the road in court.”
Republican Senator J.D. Alexander, his chamber’s budget chairman, said courts can’t make the Legislature spend money and suggested lawmakers should ignore Fulford.
“I do not believe any court has the authority to dictate how the Legislature spends its money,” Alexander said.
Andy Ford, president of the Florida Education Association, the state’s largest teachers union and a plaintiff in the lawsuit, said lawmakers “have made their choices.”
“They have decided in this state over and over again to provide tax relief to big corporations, the people who put contributions into their campaigns, and it needs to stop,” he said. “They need to fund the services of the state of Florida.”
Breaking a Promise
States have run into legal trouble by changing promised benefits, said Snell of the NCSL.
“That’s the crux of it in many of these issues,” he said.
In Arizona, more than 200,000 teachers and other public employees are in line for a $277 refund, according to the Tucson Citizen, after a Maricopa County judge ruled last month that the Legislature’s decision to increase existing employees’ payments into the system was unconstitutional.
In New Hampshire, Merrimack County Superior Court Judge Richard McNamara in January rejected an increase in employee contributions, saying it broke a constitutional guarantee.
“It requires employees, who have already met the requisite service and age requirements, to pay additional amounts -- which may be an amount reserved for other expenses, like mortgages, housing and food -- without receiving additional benefit,” McNamara wrote.
Meanwhile, judges threw out lawsuits in Colorado and Minnesota, ruling pensions may alter some post-retirement terms.
Florida’s law requires workers to contribute to their pensions for the first time since 1974.
Otherwise, government would have to cut services for “vulnerable people across the state,” said Senator Don Gaetz, a Republican from Niceville.
“We went down into the basement of the old Capitol and dug for Confederate gold, but we couldn’t find any,” Gaetz said.
“That money would have to come in the form of reductions in funding for the critical services for the people of Florida,” he said. “And that creates a real problem for the Legislature as we are ending the session.”
Brandon Larrabee of the Florida Courier reports, Judge strikes down pension overhaul:
In a stinging rebuke to Gov. Rick Scott and legislative Republicans, a state judge struck down a key portion of last year’s pension overhaul, a decision that could eventually force the state to return hundreds of millions of dollars to its employees.
The ruling from Circuit Court Judge Jackie Fulford bars the state from requiring employees hired before July 1, 2011, to contribute 3 percent of their income to their retirement plans. It also struck down a portion of the law that would reduce the cost-of-living increase for those employees.
Scott said the state would appeal the decision, likely resulting in a stay that would allow the law to remain in place for now. Opponents of the law said they expect the state to continue withholding the 3 percent until the Florida Supreme Court rules on the issue.
Millions in savings
The provisions struck down by Fulford’s decision were expected to save the state $861 million a year – money that would eventually have to be paid back if the appeal fails. It would cost counties around $600 million a year to have the changes reversed, likely leading to service cuts at the local level.
Scott and the lawmakers who pushed the provisions in last year’s session said the changes were needed to bring public workers’ pension plans in line with the private sector and help patch a multibillion-dollar hole in the state budget. But Fulford said that was not a good enough reason to ignore a law that essentially casts the pension plan as a contract between the state and its workers.
"The Court cannot set aside its constitutional obligations because a budget crisis exists in the State of Florida," Fulford wrote. She added that ruling for the state "would mean that a contract with our state government has no meaning, and that the citizens of our state can place no trust in the work of our Legislature."
Employees and unions who had taken the fight to court were elated by the ruling and said Scott and lawmakers should move quickly to reimburse state workers.
"They gambled taxpayers’ money that they could balance the budget on the backs of the hard-working public employees of this state," said attorney Ron Meyer, who represented the plaintiffs in the case. "They lost that bet today."
Instead, state Republicans and their allies seemed to dig in – painting Fulford, who has ruled against them before, as an activist judge and vowing to push ahead with an appeal.
Scott: That is wrong
Scott told reporters that Fulford’s ruling "doesn’t make any sense to me" and said she had overstepped her bounds.
"This is writing the laws of the land," Scott said. "That is wrong. And I’m very comfortable this will be held to be constitutional."
House Speaker Dean Cannon, R-Winter Park, said lawmakers wouldn’t immediately try to find the funds to reimburse employees.
"A first opinion by a single trial court judge is a long, long way from final," Cannon said. He said the decision "validates the wisdom of always having a billion dollars in reserve," a House budget policy in recent years.
Senate President Mike Haridopolos, R-Merritt Island, also said the Legislature would not re-open the budget, which is already printed and was ready for a final vote Friday.
"I do not expect to open the budget, I expect to win the court case," he said.
But Fulford’s ruling still touched off a round of speculation about how lawmakers could find the money if it came to that. Groups who have pushed for the state to consider closing tax loopholes or otherwise finding new revenues renewed their calls, which have run into resistance among Republicans who find tax increases unpalatable.
Meyer said that the state should tap its reserves to repay employees. But supporters of the law were already suggesting ideas that would hit the same workers who sued the state.
"While investing in our economy and our teachers is a priority of many, it would be ironic if the union lawsuit that brought forward this activist judge’s ruling actually reduced the salaries of government workers and the union members they represent by three percent," Florida Chamber of Commerce President and CEO Mark Wilson said in a statement issued Tuesday.
Meyer acknowledged that possibility.
"If the Legislature and the governor want to punish workers, I’m sure they’ll find ways of doing it," he said. "But they’re not going to do it by imposing this tax upon their salaries."
Taylor supports ruling
State Rep. Dwayne Taylor (D-Daytona Beach) released the following statement about the ruling, "The judge’s ruling confirms what I have said before. Cutting workers’ salaries is not only unfair but it is unconstitutional.
"The Florida Constitution requires the state to live up to its promises, including those made to public workers. It is inappropriate for the Legislature to balance the budget on the backs of teachers, law-enforcement officers, firefighters, nurses and other public servants,’’ he added.
I must say, I am a bit surprised that Florida's public sector workers are not required to contribute to their pension plan but if this was part of the deal, then they do have a constitutional case and can fight any appeal all the way to the Supreme Court if they have to.
What is also worth noting is how the state pension fund is managed. Did the state top it up throughout the years? Is the money being managed properly? As I wrote two years ago, Florida is rolling the dice on pensions, betting billions on alternatives, pretty much following the rest of the pension herd. I'm not a big fan of this approach as it's expensive, risky and will do little to address Florida's pension deficit.
Below, Florida Gov. Rick Scott responds to the ruling by Leon County Circuit Judge Jackie Fulford that the state's pension reform law -- requiring government employees to contribute 3 percent of their pay to the state pension plan -- of 2011 was unconstitutional.