In the state of Michigan, an arbitrator recently ruled that the pensions of current workers, in this case Detroit police department employees, could be reduced in light of the city’s financial struggles. Reducing the benefits of current workers is not only controversial but goes against the laws and traditions that many states have on the books. But it would appear that desperate times call for desperate measures, and the economic woes of Detroit could certainly be described as desperate. Officials in states across the country may move beyond two-tier plans that only impose pension cuts for new hires, which offer rather limited savings. At the forefront of debate is whether or not pensions for current workers can (and should) be reduced, a question that appears all the more timely in light of the ruling in Michigan, as well as the possibility that other governments may seek reductions of their own. That is not to say the issue is without legal sticking points, and in many cases may depend on the strength of constitutional protections.
When it comes to constitutional protections for public sector retirement benefits, the following is a summary of state law on the matter in California: “A public employee's pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment. Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity.”
Detroit’s reform presents a rare example of cutting back the amount of pension benefits that a current employee receives in comparison to other reforms that governments have relied upon. Due to the arbitrator’s ruling, lieutenants and sergeants will earn pension benefits from 2.1 percent of their salary per year, which will be a reduction from 2.5 percent. Originally the city sought to entirely freeze its pension fund, but the arbitrator rejected the proposal. The New York Times reports:
“But government workers, many of whom were recruited with the promise of good benefits and pensions, say that it would be unfair — and in many cases, very likely illegal — to change the rules in the middle of the game. It has been far more common for cities and states to adopt more modest retirement plans for future workers. But the savings from new plans are initially small, growing only over time. Other states have gone further, requiring workers to work more years before retiring, or to contribute a higher portion of their salaries toward their pensions.”
One method of reform, reducing cost-of-living increases for retirees, has already resulted in lawsuits in several states.
Part of the arbitrator’s report states that the local government’s pension costs “threaten both the city’s fiscal viability, as well as its wherewithal to provide public safety for its citizens.” Another section mentions that “Evidence showed that less than 37% of Detroiters are actually employed. The City's three major revenue sources, property taxes, state revenue sharing, and income taxes, have been declining and are projected to continue to decline.” You can read the arbitration document here.