Rhode Island’s Pension Cuts: Necessary and Legal

Photographer: Rick Friedman/Bloomberg

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Photographer: Rick Friedman/Bloomberg

From Athens to Rome to Providence, Rhode Island, the painful truth about pensions is the same: Unfunded liabilities need to be reformed, and unions don’t like it.

The difference: Europeans go to the streets when they are unhappy, and Americans go to the courts. In Rhode Island, a pension-reform plan hailed as a national model is being challenged as unconstitutional. Striking down reform would be a disastrous move -- not only for budgets but also for constitutional governance itself.

It’s easy to sympathize with workers’ desire not to have their pensions touched. Many have built decades of expectations on the basis of generous pension plans, and it seems unfair that they should lose out because benefits negotiated on their behalf turn out to be fiscally unsustainable. Moreover, employees, including public employees, think of themselves as protected by contracts that specify those benefits -- and according to the federal and many state constitutions, states are not supposed to make laws impairing the obligation of contracts.

Yet the equation of benefits with inviolable contractual rights is too hasty, both legally and morally. As a legal matter, many public-pension plans are in fact created by statute, and it is well established that what a legislature may do by law, it may also undo. Most of the Rhode Island pension plans are clearly statutory.

Fiscal Viability

Even when benefits are created by contract, the states’ obligation to respect those contracts has long been interpreted to allow for them to be altered or even eliminated when public necessity demands it and the modification is deemed reasonable. The looming fiscal crisis in Rhode Island -- and in many other states and cities -- certainly satisfies the condition of necessity. Changes to the age of retirement and the mix of public and private guarantees are reasonable by any measure. In the end, the point of modifying pension plans is to preserve the fiscal viability of the government, which is much better for its creditors than seeing it collapse under the burden of obligations it cannot meet.

The moral justification for this legal rule is straightforward: The government creates property rights, and so the government can modify those rights when necessary. The same principle underlies taxes, which Supreme Court Justice Oliver Wendell Holmes Jr. memorably called the bill for civilization. The government may take some of the money I’ve earned because without its protection I wouldn’t be able to keep it -- or earn it in the first place.

It’s certainly unfair that some people get penalized when the government finds it has overreached, and it’s especially painful when the victims are working class rather than financiers. But the same principle that allowed the government to pay Chrysler’s senior secured creditors 29 cents on the dollar applies equally to unions. In a pinch, the government may curtail some property rights to preserve the health of the whole system. No one ever likes it -- and everyone, regardless of political preferences, makes the same conservative property argument against it.

So what protection does anyone have against a government that runs into crises and has to resolve them by spreading the pain around? The answer, bluntly, is democracy. If debt-holding hedge-fund managers didn’t like the Barack Obama administration’s Chrysler strategy, they could try to take him out of office (and, believe me, they did). If unions ultimately don’t accept that pension reform is necessary to save the governments on whom they rely for their jobs, they can go after the politicians who designed it. To this extent, the Europeans have it right: The proper response to policies you don’t like is to protest, not to sue.

Political Judgment

In fact, the courts are the worst possible avenue for trying to block reform. The judgment that the system is broken and needs to be fixed is the very model of a political judgment best left to elected officials. They are the ones who understand practical realities -- and they are the ones who lose their jobs if real-world problems aren’t fixed.

The constitutional separation of powers is designed to preserve crucial political decisions for the political branches. True, judges can and should defend vulnerable minorities against discriminatory legislation passed by the majority. But this important role applies when there is a serious example of discrimination or when civil liberties are infringed. It shouldn’t serve as a cover for blocking the majority from doing what is economically necessary to keep the state alive and healthy.

The lesson of judicial restraint on economic matters has been hard-won in U.S. history. In the early decades of the 20th century, conservative, property-protecting judges blocked progressive legislation on the grounds that it infringed the liberty of contract. It took the New Deal and President Franklin Delano Roosevelt’s court-packing threat to persuade the Supreme Court to allow Congress to legislate freely in the economic sphere. The legal challenge to Obama’s health-care reform was another example of conservatives using the cover of constitutional doctrine to disrupt a political result that they didn’t like. It took Chief Justice John Roberts’s principled stand for judicial restraint to uphold the law.

In the bad old days, judges were conservative because they were drawn from the property holding class. Today, judges in Rhode Island may have a common class interest with other public employees because they also have pension plans that are subject to reform. (Indeed, the state is seeking to have the judge assigned to the case removed over conflict of interest.) It would be equally conservative -- and equally inappropriate --for those judges to block necessary reforms on the ground that they impair the obligation of contracts.

The Rhode Island courts should respect the law, restrain themselves, and make sure that their state continues to be seen as a leader in fiscal reform, not in judicial backlash.

(Noah Feldman, a law professor at Harvard University and the author of “Scorpions: The Battles and Triumphs of FDR’s Great Supreme Court Justices,” is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: Noah Feldman at noah_feldman@harvard.edu.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

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