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Friday, April 16, 2010

Is This The Way Out For States On Retiree Benefits?

Underfunded state retirement systems are one of the greatest problems facing states. There does not seem to be a way out, as municipal and teachers' unions are loathe to negotiate substantial reforms and state governments simply do not have the money to meet unsustainable promises.

An interesting case was just handed down in federal court in Rhode Island, which may provide a legal path for state governments to modify retiree benefits through legislation.

The gist of the decision is that once a union contract has expired, the state may have the right to alter retiree benefits promised under such contract. To oversimplify a bit, once the contract is over, the contractual rights under the contract are over.

The full case decision in Rhode Island Council 94 v. State of Rhode Island is embedded below. Here is a summary as reported in The Providence Journal, Judge sides with R.I. on retiree health benefits:

U.S. District Court Judge William E. Smith has upheld the state’s trimming of health-care benefits for state employees who retire early.

Governor Carcieri on Thursday proclaimed the decision “a victory for all taxpayers” that affirms state officials’ legal authority to better align employee benefits with what the government can afford.

“It was a huge cost-saver to the state,” said Carcieri spokeswoman Amy Kempe. A savings estimate was not immediately available.

But Kenneth DeLorenzo, executive director of the employees labor union, Rhode Island Council 94 of the American Federation of State, County and Municipal Employees, denounced the decision as a historic repudiation of the state’s obligations to its employees.

Council 94 had sued to block implementation of the law on state-subsidized health-care benefits — a law that Judge Smith described as an attempt by the state amid a fiscal crisis in 2008 “to tighten its belt” by reducing the amount it spends on those benefits.

In a decision entered Tuesday, Smith rejected claims by the union that the reduction in benefits violated employee rights under the contract clauses of the Rhode Island and U.S. Constitutions. Contrary to the union claims, he said, no enforceable contract exists for retiree health benefits under the state’s past practice regarding retirees, the negotiated collective-bargaining agreement between Council 94 and the state, state statute and common law.

At the time the law took effect, on Oct. 1, 2008, the collective-bargaining agreement had expired and pronounced by the governor to have been “terminated” — an important legal distinction, according to the judge.

Council 94 contended that the agreement’s provision for retiree health benefits nevertheless remained in force. The judge said no.

This case certainly will be appealed, because it has tremendous implications nationwide.

While there certainly were nuances specific to the Rhode Island laws and union contracts at issue, the case provides a potential pathway for beleaguered states to address unsustainable retiree benefits through legislation.

At a minimum, the case gives states greater negotiating leverage to call the bluff of unions which consider their contracts insulated from the economic troubles facing the states.

Ri Council 94 v State of Rhode Island

Related Posts:
Unions Pushing States Toward Broken Promises
High Taxes And Union Pensions Are Killing Rhode Island. Duh!

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  1. "'U.S. District Court Judge William E. Smith has upheld the state’s trimming of health-care benefits for state employees who retire early.... Council 94 contended that the agreement’s provision for retiree health benefits nevertheless remained in force. The judge said no.'"

    Sounds like a solid, sound, and un-biased federal judge. Good to see they are still out there!! :)

  2. Bush tried to get him appointed to the Court of Appeals but the Dems stalled the process.

  3. I am not a state employee but I have a great deal of heart burn over this approach. Sure may save the taxpayer, but on the backs of others.

    1) If I was offered an early out package with either a designated lump sum pay out or a guaranteed income stream starting X date and take that to my financial planner. He/she says go for it.

    Say the State wishes to reduce that by half or wants money back. You find this an acceptable solution? Since the State reneged on its initial offer to the early retiree, do they get a 'do over' like getting their job back?

    2) It totally lets the real evil doers, the politicians from any consequences of their malfeasance. Any equity in that? I could make the argument that there is a moral hazard component here.

    3) Finally this will backfire. The Unions will start insisting on survivor clauses regardless on the length of any future contracts. Not only that but State employees will refuse to accept ANY early out offers from any political district. So then they face the very ugly prospect if discharges and battles in court over such firings.

    No this is not a way out, This is a trap that could blow up in Rhode Island's face.

  4. Wow. As an upstate NY'er, this is potentially very good news indeed.

  5. Game, set, match to the taxpayers.

  6. I have never believed that anyone should get early retirement unless they finance it themselves. It truly is a scam, and I am not blaming the individuals, but the system that encourages "captain for a day," etc., and lump sum pay to leave early. I would like to see the early retirees not be able to draw until 62 or 65 like SS. I'm not saying they would have to work until then, they could still leave early, they just couldn't start collecting.

    What good will it do government employees to revolt when those they work for are broke? It actually would be a benefit for the taxpayer to have some sectors of government voluntarily leave.

    I live by Delphi (formerly a GM company) and it is amazing how many people line up to get that $11 an hour job. Here in Michigan, people are now glad to get that much.

    I get so sick of government dependents' claims of "you promised". Evidently, they never heard the only thing certain was death and taxes. When it was convienent for Obama, he voided bondholder rights in an ends justifies the means way.

  7. Should government workers have a right to unionize in the first place? It's not like their employer is a private entity that can act illegally or in bad faith. Why do we set up sovereign immunity for government if we don't believe it to ultimately be an entity rooted in fairness and goodwill. Why would workers need to worry about such an entity bargaining in bad faith? And why do we have to be exposed to the dangers of striking teachers, cops, firemen or air traffic controllers? If our military has to rely on the goodwill of Congress for their compensation and benefits, why do non-military government workers enjoy a far more powerful posture in negotiating pay and benefits?

  8. Becky, I worked for a corporation and took early retirement. Trust me, I earned every dime of the pension money that was dumped into my retirement accounts. Whether you know it or not current US law there are stiff tax penalties for withdrawing retirement funds before you are 591/2. Plus you must still accept the tax requirement for converting said funds to ordinary income in the year the conversion occurs. So its a double whammy to do the withdrawal.

    But I can assure you one thing, corporations are very shrewd. They have computed the yields on the savings by offering certain employee segments early retirement packages. I assume that state comptrollers as just as smart as the average corporate CFO.

    As to your example on shafting bondholders. Well that has consequences as well The basis points for bonds on industries like banking that are possible takeover targets have gone up. All you have to do is look up the default swaps rate.

  9. This shouldn't really come as a surprise. Federal courts have ruled consistently that when it comes to promised military retirement benefits the Gov't can modify whenever they want. A promise included in a recruitment contract is not a real guarantee of receiving that benefit. They are just extending this practice to state level.