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In defeat, a victory for Baltimore pension reform

Baltimore's Fraternal Order of Police is celebrating what is, at most, a Pyrrhic victory in its effort to reverse the pension reforms Mayor Stephanie Rawlings-Blake and the City Council enacted two years ago. Federal Judge Marvin J. Garbis' ruling that a key provision of the reform plan was unconstitutional appears to mean that the entire law has been struck down. But his ruling also made clear that the vast majority of the provisions in the law are permissible and that even in the part he objected to, a slight change in the plan's design could meet the city's fiscal objectives without violating the Constitution. How Judge Garbis and the two parties in the case will proceed is not clear — the consequences of the ruling may be costly to the city in the short term — but the basis for making changes to Baltimore's police and fire pension systems has now been affirmed.

Here's why Mayor Rawlings-Blake and the council enacted the pension reforms in the first place: In 2010, as the city was contemplating $50 million in new taxes and fees on residents and major cuts in public services just to keep the budget balanced, Baltimore was also on the hook for a $165 million contribution to the fire and police pension system, some $64 million more than the mayor had budgeted. Had the city done nothing, the problem would have only gotten worse in future years. Making up a $64 million difference would have required increasing the property tax rate by 18 or 19 cents, or cutting more than the entire budgets for the library system and the Department of Recreation and Parks.

Based on recommendations from a study by the Greater Baltimore Committee and a private consultant, the city enacted several key changes, including: increasing the minimum service requirement for full retirement from 20 to 25 years for any employees with fewer than 15 years in the system; increasing the minimum employee contribution to the system; and changing the way the city calculates the average final salary for a police officer or firefighter. Despite the fact that all three of those reforms change the terms current police officers and firefighters had agreed to in their contracts, Judge Garbis ruled that they were permissible.

The one change that he objected to dealt with the city's effort to end a foolish benefit approved during Mayor William Donald Schaefer's administration in 1983. The so-called variable benefit provision allowed for permanent increases in employee pensions in years when the pension fund's performance in the stock market exceeded a certain threshold — but didn't reduce them at all when the market went down. Over time, this created a predictable problem: Investment earnings in good times that should have been shoring up the system were instead going to benefits, and in bad times, city taxpayers had to make up the difference.

Judge Garbis didn't object to the idea that the city would seek to do away with that provision in favor of fixed cost-of-living increases, nor did he quibble about the aggregate savings to the system the mayor sought by doing so. What he found unconstitutional was the precise mechanism the city adopted. Instead of providing the same cost-of-living increase to all retirees, Baltimore adopted a tiered system in which retirees under age 55 got no annual increase, those between 55 and 65 got 1 percent, and those over 65 got 2 percent. Judge Garbis concluded that such a provision was not "reasonable and necessary" to achieve the city's public policy aims and was thus an unconstitutional abridgment of the employees' contract.

Mayor Rawlings-Blake proposed the tiered system in the belief that it was better for the retirees. Since many younger retirees do not rely on their pensions for their primary source of income, she reasoned, it made sense to backload the increases for the period when they do. But it is not a defining feature of the pension reform plan. The city can, as the judge noted, achieve its financial goals through other means.

The city is unhappy with the ruling and is likely to appeal; even being on the hook for two years' worth of cost-of-living increases for those retirees who didn't get them could be an expensive proposition. But in a broader context, this ruling represents an important victory for the city. Even though the judge concluded that the one objectionable provision of the law cannot be separated from the rest and that the entire statute must be struck down, the mayor and City Council now have a sense of what is possible.

To their credit, the unions have long shown a willingness to make concessions, even if the ideas they offered before were not sufficient. The best hope now is that the city and unions can use this ruling as the basis of a deal that ends the litigation, shores up the pension fund and protects Baltimore's taxpayers.

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