The unions are arguing that the cuts amount to
eliminating benefits that members, including retirees, have already earned.
They made the same case in Colorado and Minnesota, where pension
reform cut COLA levels. But judges ruled in both cases that COLAs were not
protected by contractual language or constitutional provisions.
The lawsuit filed
by New Jersey
unions yesterday challenging the state's pension and health care reform
legislation was expected. Unions vowed back in June, when the measure was being
debated and voted on, that they would ask the courts to block it if it became
law. What is different, however, is that since then judges in two other states
have ruled against unions who were challenging similar pension reforms. In
particular, judges in other states have upheld a key element of pension reform
that rests at the center of the Jersey
legislation.
The Jersey bill, signed into law at the end of June, requires
workers to contribute more to their pensions and health benefits and also
suspends cost-of-living adjustments for retirees until the state's pension
system regains its fiscal health. Those annual COLA payments are deceptively
expensive. In a paper last year, Joshua Rauh
and Robert Novy-Marx estimated that every one percent
reduction in COLAs would reduce unfunded pension liabilities nationwide in
state and local plans by nine percent. In Jersey,
the savings are bigger. Rauh estimated that each
percentage point cut in COLA payments would reduce unfunded liabilities by 16 percent, and Jersey's move
to eliminate them could cut total liabilities by more than half. Rauh has estimated those liabilities at $120 billion.
The unions are arguing that the cuts amount to eliminating benefits that
members, including retirees, have already earned. They made the same case in Colorado and Minnesota,
where pension reform cut COLA levels. But judges ruled in both cases that COLAs
were not protected by contractual language or constitutional provisions. In
Minnesota, a judge observed that the state was not trying to raid the pension
fund but was actually increasing its own payments into the fund, and that those
payments in addition to the benefits cuts were designed to keep the system
solvent. Jersey is doing the same thing. We
shall see if a Jersey judge agrees.