Federal Judge Clears Way for Changes In Maryland Pension System
A federal district judge has ruled that the Maryland legislature had a right to reform the public employees' retirement system, despite allegations by the Maryland State Teachers' Association and other unions that in doing so the state violated a contract agreement.
Judge James R. Miller ruled on Sept. 25 that the legislature's decision to change the state employees' pension program earlier this year by putting a cap on cost-of-living increases, reducing benefits, and increasing employee payments was "a reasonable response to an important public concern ... and justified by a rational legislative purpose."
The suit was filed by the msta in April in response to a bill passed by the legislature that same month. In the suit, the msta argued that because in 1979 the legislature created a contract between the state and its employees regarding retirement benefits, state officials had no right to "impair the contract in a substantial way."
Until Dec. 31, 1979, all Maryland teachers and state employees were required to become members of either the Teachers' Retirement System or the Employees' Retirement System and to contribute 5 percent of their salaries toward their pensions. Under those plans, teachers and other employees received defined retirement benefits and unlimited cost-of-living pension increases.
In 1979, the legislature passed bills that established a two-tiered pension system. Under the terms of the bill, an employee could remain in the original pension system, with unlimited cost-of-living adjustments and 5-percent contributions, or elect to transfer into a newly created pension plan--the Employees' Pension System or the Teachers' Pension System. Any employee hired after Dec. 31, 1979, could join only the new pension system.
Under the new program, cost-of-living adjustments were capped at 3 percent but employees were not required to contribute to the plan. At that time, the legislature also agreed that those employees who elected to stay in the original retirement system could remain without any change in benefits.
However, in its 1984 session the legislature passed the "Pension Reform Law," which amended the 1979 law. The 1984 law offered four retirement options instead of the previous two. One of those options allowed the employees to remain in the original retirement plan with an unlimited cost-of-living adjustment but required them to contribute 7 percent rather than 5 percent to the pension program.
The other three options included: the transfer of all service credits from the former retirement system to the pension system, combined with a return to employees of part of their contribution to the former system; a combination of the two programs, in which the employee would keep credits accumulated before July 1, 1984, in the old system, with unlimited cost-of-living adjustments, while benefits accrued under the pension system after July 1, 1984, would be subject to a 3-percent cost-of-living cap with no further employee contributions; and a 5 percent/5 percent option, in which an employee could remain in the retirement system, but cost-of-living adjustments and employee contributions would be limited to 5 percent.
"Each one of the new options offered by the legislature in 1984 changed the benefits, either by changing the contribution rate or the amount an employee could receive upon retiring," said Janice Piccinini, president of the msta
But the court ruled that the6changes did not constitute a breach of contract, on the grounds that one legislature "cannot bind subsequent legislatures for work and services to be performed by state employees and teachers in the future." It also found that the contract rights of the state employees and teachers were not substantially impaired by the changes in the retirement systems.
The court further noted that the legislature acted correctly when it revised the retirement systems, because "[the 1984 act] clearly enhances the state's ability to plan fiscal strategies more accurately by placing some cap on pension costs."
Ms. Piccinini said the msta filed a motion on Sept. 28 asking the judge to reconsider his decision, claiming there was an error in the analysis used to determine the financial impact the new pension systems would have on employees. She said that if the judge denies the motion to reconsider, the association will appeal the ruling.
"This [ruling] will have an impact around the country, because every state is going through a budget crunch, and, as usual, all turn to public employees," Ms. Piccinini said. "Retirement systems seem to be the way state governments now get their money,"she added.
Susan Gauvey, assistant state attorney general, said it is estimated that the change in retirement benefits could save the state $50 million in the first year; any money saved will go back into the pension system, she added.
She also said each employee affected by the suit will have six months after the judge issues his decision on the motion to reconsider the case to determine which plan to participate in. The choice, however, will be retroactive to last July, when the bill went into effect, Ms. Gauvey said.