Although the attention was focused on whether Mayor Stephanie Rawlings-Blake's bottle tax would be resurrected, the most important decision the City Council made Monday night was its vote to enact a series of benefit cuts to Baltimore's police and fire pension plans. The bottle tax will raise, at best, $5.7 million. But if the council hadn't done anything about the pension, the city would have been on the hook for another $65 million, more than all of the tax increases Ms. Rawlings-Blake proposed this year put together.
But the council's vote will likely not be the end of the story. The unions have already filed a federal lawsuit alleging that the city failed to adequately fund their pension during the last several years, and that was likely just a placeholder for legal action to try to block these reforms on the grounds that they amount to a breach of contract. In a meeting with The Sun's editorial board last week, the heads of the local Fraternal Order of Police and International Association of Fire Fighters, as well as their attorneys, argued that Baltimore has a moral and legal obligation to live up to its promises to public safety employees and that the council's approval of these pension reforms would have disastrous effects on the city's ability to attract and retain qualified police officers and fire fighters.
Not only that, they said, but cutting benefits without the unions' consent would be reckless. If the unions sue and win, the city would be on the hook for the full $65 million in additional contributions this year and more the next. Union officials say they offered a series of concessions that would have made their plan affordable but that the city wouldn't negotiate.
To their credit, the unions were willing to compromise on a number of points — notably, they were willing to raise employee contributions into the plan and to accept fixed annual benefit increases instead of an ill-advised provision that gave them benefit increases in years when the plan's investments did well but didn't take them back in years when the investments tanked. But the unions didn't go far enough, and they refused to budge on the question of whether the retirement age should be raised for current workers. Their concessions would still have meant unsustainable growth in the city's contributions to the plan without sufficiently guaranteeing the fund's long-term viability.
The ability of police and fire fighters to retire after just 20 years on the job is one of the main drivers of the pension system's cost. The average life expectancy for a 20-year-old who joined the force this year is about 75, meaning he or she could work for 20 years and receive a pension for 35. As life expectancies steadily increase, that ratio becomes more and more lopsided. The city's pension reform bill takes a small step toward changing that by increasing the minimum to 25 years of service for all employees who now have less than 15 years on the job.
Coupled with increases in employee contributions that are slightly greater than those the union offered and guaranteed annual benefit increases that are slightly less generous than the union wants, the city's plan saves nearly $400 million over five years. The unions claim that their plan achieves a similar level of savings, but that contention comes with some fine print.
The city's plan for pension reform includes two key steps to make the fund more stable. One reduces the assumed interest returns on the fund's investments from 8.25 percent to 8 percent. Another changes the amount of time over which the fund's liabilities can be amortized from 30 years to 20 years.
The unions claim both changes are unnecessary, which is curious since their initial lawsuit against the city is centered on the claim that Baltimore officials made overly generous assumptions about the pension's investment growth and thus underfunded it. And on the point of amortization, the Government Accounting Standards Board issued a draft opinion this month indicating it is likely to disallow the 30-year amortization of liabilities in favor of a calculation based on the average remaining career span for a pension plan's employees. That means the plan will probably have to use a figure even lower than the 20 years the city is using in its calculations. If the union's plan is analyzed with a 20-year amortization, it becomes about $286 million more expensive than the city's plan over the next 12 years and stabilizes the fund more slowly.
What about the union's legal argument, that a contract is a contract? Federal case law indicates that when it comes to government pensions, the question is a bit more complicated. Supreme Court decisions have revolved around a three part test: Does the law expressly indicate a contractual obligation for the promised benefits; would the changes result in "the substantial impairment of a contract relationship"; and is that impairment "reasonable and necessary to serve an important public purpose"?
On the first point, city law does expressly set up a contractual obligation with regard to the main benefits, though not for the variable benefit increases based on investment performance. On the second point, the city's law department argues the changes don't substantially impair the contract, though that seems like a hard case to make. But on the third point, the city is on solid ground. Without changes to these pension benefits, Baltimore would face disaster. It would be forced to lay off hundreds of active police and fire fighters — other departments have already been cut to the bone — or to jack up the city's already sky-high property tax rates. Either one would be devastating.
Active and retired police and fire fighters are understandably angry about these benefit cuts, and continuing to fight them — as union leaders have pledged to do — would no doubt be emotionally satisfying. But a new lawsuit benefits no one. Even if the unions sued and won — by no means a sure thing — the net result would be layoffs for police and fire fighters. That's bad for the unions, bad for the officers and bad for the city.