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Public pensions, once unassailable, start to look vulnerable

By Mary Williams Walsh


First in Detroit, then in Stockton, California, and now in New Jersey, judges and other top officials are challenging the belief that public pensions are untouchable.

Gov. Chris Christie of New Jersey delivered the latest blow Tuesday, when he rolled out a proposal to freeze that state’s public pension plans and move workers into new ones intended not to overwhelm future budgets or impose open-ended demands on taxpayers.

The first crack came in Detroit, where a judge ruled that public pensions could, in fact, be reduced, at least in bankruptcy. Then, just a few weeks ago, an opinion by the bankruptcy judge for Stockton, which emerged from Chapter 9 on Wednesday, called California’s mighty public pension system, CalPERS, a bully for insisting in court that pension cuts were wholly out of the question.

Such dogma “encourages dysfunctional strategies,” wrote the judge, Christopher Klein, chief judge of the U.S. Bankruptcy Court for the Eastern District of California. He said CalPERS’ legal arguments were invalid, and he concluded that it lacked standing to dominate the courtroom discussion the way it had. Stockton did not even seek permission to freeze its pension plans, but the judge nevertheless wrote that it was entitled to do so and cited steps that struggling cities in general should take to trim their pension costs legally.

For starters, he recommended negotiating with their unions.

It may be sheer coincidence, but New Jersey seems to have taken Klein’s instructions to heart, even though states cannot file for bankruptcy and thus lack that particular leverage. For months, a pension commission formed by Christie has been working quietly with the New Jersey Education Association By talking to each other instead of battling in court again, the two groups managed to find enough common ground to issue what they called a “road map” toward solving New Jersey’s pension problems.

Many details remain in flux, and the union took pains Tuesday to say it was not endorsing Christie’s full proposal and might never do so. But the road map identifies certain issues that are so important to New Jersey’s teachers that the union is willing to consider a pension freeze if that is what it takes to fully protect its members from the state’s looming pension meltdown.

To appreciate how unusual it is for a state to propose a pension freeze, it helps to understand the “vested rights doctrine,” the legal argument that public pension plans cannot be frozen or reduced. Most states uphold some form of this doctrine, though in some it is a matter of statute, in others it is enshrined in the constitution and in still others it stems from court precedent. Often, the provisions have been in place for decades and attracted little notice until recently, when baby boomers began to retire in large numbers, placing pressure on public pension funds and the state and local budgets that support them.

People have sometimes suggested freezing public pension plans to keep the hole from getting deeper. But officials usually say that is impossible, and few want to mount a costly test of the doctrine, especially because the judges who would decide such a case usually participate in public pension systems themselves.

Companies, by contrast, can legally freeze their pension plans and have been doing so for years. Since 1974, companies with pension plans have been governed by a single federal law, the Employee Retirement Income Security Act, which details how freezes must take place to pass legal muster. One basic requirement is that workers midway through their careers are entitled to keep whatever portion of a pension they managed to earn until the date of the freeze.

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