Billion-Dollar Florida Battle Shows Challenge of Pension Cuts

A court order forcing Florida (STOFL1) to forgo $1 billion it planned to take from state workers to shore up its budget is the latest sign of how difficult it can be to reduce government-backed retirement benefits.

Of 41 U.S. states that made significant pension changes in 2010 and 2011, at least 13, or almost 30 percent, have faced court challenges, according to the National Conference of State Legislatures.

“It can be very difficult,” said Ron Snell, a senior fellow at the organization who has studied pensions. “There are many obstacles in the way of policy makers.”

States such as Florida (STOFL1), whose $152 billion retirement fund is the third-largest of any state, increased employee contributions and eliminated cost-of-living-adjustments to free up tax dollars. With 29 states facing a total of $47 billion in budget shortfalls next year, according to the Center on Budget and Policy Priorities, orders to repay workers may create new obstacles to solvency.

At the same time, some pensions are ailing. Investment losses left state and local pensions with $3.6 trillion in unfunded obligations, according to an October 2010 study by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester.

State pensions in 2010 had on average only 74.6 percent of the assets they needed to cover promised benefits, according to a Bloomberg ranking. Florida had 84 percent.

‘Unconstitutional Taking’

This week, the state appealed Leon County Circuit Judge Jackie Fulford’s decision that blocked Republican Governor Rick Scott’s plan to buoy the budget. The changes to promised benefits violated collective-bargaining rights and were an “unconstitutional taking of private property,” the judge ruled.

The changes were intended to save $1 billion a year by requiring workers to contribute 3 percent of their pay and eliminating cost of living adjustments for those retiring after the law took effect in August.

The state’s appeal put a hold on Fulford’s order to repay workers, and lawmakers continue to work on their $70 billion budget for fiscal 2013, a spending package that anticipates savings from Scott’s plan. It is scheduled for a final vote tomorrow, the last day of the annual legislative session.

The judge’s decision “is not going to affect this year’s budget,” said Representative Will Weatherford, a Wesley Chapel Republican. “We feel very confident that we’ll win later on down the road in court.”

Coddling Corporations

Republican Senator J.D. Alexander, his chamber’s budget chairman, said courts can’t make the Legislature spend money and suggested lawmakers should ignore Fulford.

“I do not believe any court has the authority to dictate how the Legislature spends its money,” Alexander said.

Andy Ford, president of the Florida Education Association, the state’s largest teachers union and a plaintiff in the lawsuit, said lawmakers “have made their choices.”

“They have decided in this state over and over again to provide tax relief to big corporations, the people who put contributions into their campaigns, and it needs to stop,” he said. “They need to fund the services of the state of Florida.”

States have run into legal trouble by changing promised benefits, said Snell of the NCSL.

“That’s the crux of it in many of these issues,” he said.

Breaking a Promise

In Arizona (STOAZ1), more than 200,000 teachers and other public employees are in line for a $277 refund, according to the Tucson Citizen, after a Maricopa County judge ruled last month that the Legislature’s decision to increase existing employees’ payments into the system was unconstitutional.

In New Hampshire (STONH1), Merrimack County Superior Court Judge Richard McNamara in January rejected an increase in employee contributions, saying it broke a constitutional guarantee.

“It requires employees, who have already met the requisite service and age requirements, to pay additional amounts -- which may be an amount reserved for other expenses, like mortgages, housing and food -- without receiving additional benefit,” McNamara wrote.

Meanwhile, judges threw out lawsuits in Colorado (STOCO1) and Minnesota, ruling pensions may alter some post-retirement terms.

Florida’s law requires workers to contribute to their pensions for the first time since 1974.

Otherwise, government would have to cut services for “vulnerable people across the state,” said Senator Don Gaetz, a Republican from Niceville.

“We went down into the basement of the old Capitol and dug for Confederate gold, but we couldn’t find any,” Gaetz said.

“That money would have to come in the form of reductions in funding for the critical services for the people of Florida,” he said. “And that creates a real problem for the Legislature as we are ending the session.”

To contact the reporter on this story: Michael C. Bender in Tallahassee at mbender10@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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