New York, July 15, 2015 -- Recent court decisions in Oregon (Aa1 stable) and Illinois (A3 negative) shed light on the legal limits of pension reforms while emphasizing the variety of protections afforded to employee pension benefits among states, Moody’s Investors Service says in “Court Decisions Define Important Pension Risk Differences Across States.”
“Both states lost bids to change benefits that had already been accrued by employees, and the Illinois court also affirmed the state cannot change future accruals for current employees,” Moody’s VP -- Senior Credit Officer Marcia Van Wagner says. Both cases were credit negative developments, though the court defeats did not result in rating actions for either state.
Illinois is one of seven states where public employee pensions are protected by the state constitution. As such, the state’s attempt in 2013 to reduce cost-of-living adjustments (COLAs), impose higher minimum retirement ages, and cap final salary for benefit calculation was invalidated by the state’s highest court. The reforms would have decreased Illinois’ reported pension liability by around $21 billion, or 21%, as of fiscal 2014.
Oregon’s Supreme Court determined benefits for current workers can change prospectively, stating workers can receive lower COLAs upon retirement, but only associated with work not yet performed. The state’s highest court ruled that benefits already earned, including COLAs, may not be reduced because they are protected by contract law.
“Pension reforms continue to be litigated in a number of states, which will lead to additional clarity on the state-by-state framework for the permissibility of changing pension benefits,” Van Wagner says.
Virginia (Aaa stable) was able to impose employee contribution requirements without court challenge, owing to its ability to set terms and conditions for benefits. In Florida (Aa1 stable) a judge ruled changes to future benefits did not violate protections already earned. Displaying the often highly nuanced nature of public pension litigation, in San Diego CA (Aa2 stable), a state court of appeals found employee contributions were protected until expiry of a current labor contract.
Moody’s says future court decisions, particularly from the highest state courts, will provide further definition to the pension legal landscape. However, federal decisions over public pension litigation are likely to remain infrequent.
The report is available to Moody’s subscribers at https://www.moodys.com/viewresearchdoc.aspx?docid=PBM_1003792