Representing Retirees: An Interview With Stephen Pincus

After one of the worst decades in stock market history, the Great Recession has left nearly every state pension plan in a precarious position. The Pew Center on the States reports that 47 states owe more in pension obligations for current and future teacher retirees than they have on hand. Collectively, the gap between what states have and what they will need totals almost $500 billion.

Policymakers are beginning to take note of the fiscal problems in teacher retirement systems. States have recently taken action by raising retirement ages, lowering benefit payments, and reducing cost-of-living adjustments. Colorado, Minnesota, and South Dakota have recently pushed through pension reforms that were immediately met with lawsuits, and other states are paying close attention to the outcomes of these lawsuits. Education Sector discussed the cases with Stephen Pincus, a partner with the Pittsburgh law firm of Stember Feinstein Doyle & Payne, which represents government retirees who have had their cost-of-living adjustments reduced in each of these states.

Education Sector: Can you talk a little bit about how you got into this work?

Stephen Pincus: My firm has been representing retirees in the private sector, mostly involving retiree health benefits, for many years. We represented the retirees for Ford, Chrysler, and GM and the restructuring of their health care benefits, and from time to time we've also done some public pension work. We were approached last year by a group of retirees in Colorado who were concerned that the state was threatening to reduce their cost-of-living adjustments.

ES: Why are you filing suit?

SP: We're filing suit because we believe the states that have cut their cost-of-living adjustments to the retirees had alternatives available to them that they did not pursue, and should have pursued, before cutting benefits for retirees. As a law firm that is dedicated to workers' rights, we believe that the retirees we represent had their constitutional rights violated.

ES: What alternatives are you talking about?

SP: In most states, if a state employee is vested in their pension, it becomes a property right that is protected under the contract clause of the state and federal constitutions. In order to abridge that right, the state has to show that their action was "necessary and reasonable in furtherance of an important public policy." What does that mean? Courts have found that before cuts can be made to those who are vested in their pensions (i.e. retirees), a state must be on the brink of financial disaster and have exhausted all other reasonable policy options. It is our contention that pensioners have the same status as long-term bondholders, and if a state is in such dire financial shape, it should be looking to cut all of their long-term debts, not just those owed to retirees.

When people ask what alternatives were available, I use Minnesota as an example. The Minnesota State Retirement System currently has a contribution rate where the state pays 5 percent [of an employee's salary]. Compared to the median across the country, that is very low. The median as of 2008, and it's probably gone up since then, is 8.7 percent. So, when we looked at alternatives, we discovered that, had the state raised the premium that it pays from 5 percent to 5.9 percent, it would have saved the same amount of money as cutting both current and future retirees' cost-of-living adjustments. Such a proposal was politically a non-starter, as the MSRS executive director acknowledged in his deposition and as evidenced by former governor Tim Pawlenty's vetoes of bills raising taxes on the state's wealthiest citizens.

ES: What will these changes mean to the individual clients that you're representing?

SP: In Colorado, for example, we represent every person who's ever worked for any state or local government.  There's one unified pension system -- so it's every teacher, every sanitation worker, every police officer, every firefighter, and every person who served the state through the DMV. These are all people who've dedicated their lives, who've worked 20, 30, 40 years at the same job, usually for less pay than they could receive in the private sector, with the understanding that they would get a healthy retirement benefit. I'll note in Colorado most workers do not receive Social Security, because the state of Colorado and its localities do not pay into Social Security. So for most people this is their only source of income in retirement. Because of the cuts to the cost-of-living adjustment and the compounding nature of it, instead of receiving a 3.5 percent yearly adjustment, at most they'll be receiving a 2 percent adjustment. For a person who worked 30 years and receives the average benefit for someone who worked 30 years, they are projected to lose $165,000 over the course of the next 20 years. That's a substantial cut to what they were expecting to receive in retirement.

ES: Other states are following these cases closely. Do you have any advice for them as they handle their own budget crises and deal with their own underfunded pensions?

SP: They should first respect the rights of those who are vested. Certain states are doing that. If you look at the plans that are being put forth by [New York] Mayor [Michael] Bloomberg, he's not proposing to cut the benefits for those who are in the system. He's discussing putting in lower-tier benefits for new hires. The pension commission in the state of Maryland came out against cutting benefits for retirees because they said that's illegal because those rights are vested. I believe legislators who are looking at pension reform should first try to do all they can do without having to cut benefits for those who are already vested. For most places that means people who are already retired.