Their loss Wednesday in a federal appeals court left Baltimore's police and fire unions with a few options to continue the fight over Mayor Stephanie Rawlings-Blake's 2010 pension reform law, but none of them look promising. Rather than subject themselves and the taxpayers to potentially years more litigation in federal and state court, the unions should recognize that the bulk of the 2010 law is going to stand and seek a settlement with the city on the one portion of the reforms on which they have met some success.
Amid a city budget crisis, Mayor Rawlings-Blake championed a 2010 pension reform law that changed the minimum number of years of service necessary for full retirement benefits from 20 to 25 years, including for any current employees with less than 15 years on the force; increased the amount that employees must contribute to the system; and changed the way the average final salary of police and firefighters would be calculated for pension purposes.
It also changed the way cost of living adjustments (COLAs) for retirees would be determined, jettisoning a spectacularly bad system enacted during the William Donald Schaefer era that gave retirees a boost in years when the pension funds investment returns exceeded a certain benchmark but did not take them back in years when the investments fell short. This so-called variable benefit became a drain on the system because bad years in the stock market drained the fund and good years did not replenish it. The mayor's plan replaced that with fixed cost of living adjustments that increased as retirees aged.
The unions sued in federal court and initially met with a sliver of success in their argument that the city's action violated the Constitution's Contract Clause, which forbids states (or, in this case, a municipality) from passing a law that "impairs the obligation of contracts." That prohibition is not absolute, though, as courts have generally recognized that a legislative body's decisions cannot tie the hands of all its successors and that in some circumstances changes to contracts are necessary to meet a government's other obligations. The key test for the city to meet here, as far as constitutional case law is concerned, was whether the impairment was "reasonable and necessary to serve an important public purpose."
The district court judge, Marvin J. Garbis, agreed with the city's contention that the reforms were a "reasonable and necessary" response to a city budget crisis in every respect except one. He found that the tiered system for cost of living increases failed that test. This week, a three-judge panel for the 4th Circuit Court of Appeals reversed him and handed a victory to the city, but in a way that provides the unions with a sliver of hope. The appeals court said there was no Contract Clause issue because the unions could still pursue remedies for breach of contracts in the state courts.
But as it happens, state case law provides a similar standard for the abridgment of pension benefits. A government can make "reasonable modifications" to a plan, as long as it provides employees with "substantially the program" they bargained for and "any diminution thereof must be balanced by other benefits or justified by countervailing equities for the public's welfare." Maryland courts have long recognized the possibility that governments may need to make modifications to ensure the "soundness of the fund," and that is precisely what the city did. The unions may wish the city had made another policy choice to achieve that end — say, raising taxes or slashing other services in order to fund the necessary contributions to the fund — but that is a matter for the mayor and City Council to decide, not the courts.
The unions could engage in several more years of litigation in the state courts, and it could try to pursue a separate claim based on the Constitution's Takings Clause, though Judge Garbis noted in a 2012 ruling that it would be nearly impossible to succeed in that argument if the Contract Clause argument failed. But the unions need to consider that the only point on which they have made any headway so far is the question of whether the city can give smaller COLAs to younger retirees and larger ones to older retirees, not whether eliminating the variable benefit in general — or making any of the other changes in the law — was permissible. The city created the tiered COLA in the belief that it was better for the retirees, but if the unions disagree, surely the city would be willing to amend the ordinance to provide a cost-neutral, uniform alternative. If the union's leaders want to represent their members' best interests, rather than indulging in a lengthy, expensive and pointless legal fight, they will propose just such a deal.
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