PUBLIC SECTOR UPDATE: Risk Involved In Attempting To Shift Pension Costs To Current Employees

By: Sheryl Skibbe and Kathleen Cahill-Slaught

On February 1, 2012, an Arizona Superior Court handed a defeat to state employers in their effort to transfer a greater share of the cost of retirement benefits to current employees. In Barnes v. ArizonaState Retirement System, et al., (Ariz. Super.Ct., No. CV- 2011-011638), the court granted the plaintiffs’ motion for summary judgment, holding a 2011 Arizona law, which attempted to alter the employees’ percentage of their contribution to the Arizona State Retirement System (“ASRS”), was unconstitutional.

In an effort to save the State an estimated $60 million annually, theArizonalegislature passed S.B. 1614 ( signed by Gov. Jan Brewer (R) in April 2011). The bill took effect onJuly 1, 2011. The law changed the proportionate share of the annual contributions that state employers and its employees paid into the plan. Previously, the split had been set at 50 percent for the employer and 50 percent for the employee, but after passage of S.B. 1614, the contributions paid by state employees increased to 53 percent, while contributions by their employers were decreased to 47 percent.

Judge Eileen Willett sided with the seven teachers who filed suit challenging the new law’s constitutionality. Judge Willett found that forcing employees to pay additional contributions interfered with the employees’ contractual relationship with the state under the contract clauses of theArizonaand U.S. Constitutions (prohibiting the passage of a bill of attainder, ex post facto law or law impairing of the obligation of a contract). “Art. 29 § 1 of our Constitution expressly prohibits the type of diminution or impairment of Plaintiffs’ existing public retirement system benefits that S.B. 1614 exacts,” Willett said. The court observed that in 1998, Arizonans approved a constitutional amendment that states: “Membership in a public retirement system is a contractual relationship that is subject to Article II, §25, and public retirement system benefits shall not be diminished or impaired.” When the plaintiffs were hired, she wrote, they entered a contractual relationship with the state regarding the public retirement system of which they became members. Thus, the law improperly attempted to unilaterally change terms of a contract previously agreed to by the parties.

Anticipating the court’s opinion, members of the Arizona Legislature have proposed a recent measure (H.B. 2264)to rescind the increase either through the budget process or through legislation. If passed, the bill would require not only the return to the previous contribution level, but also require the state to refund contributions made exceeding 50 percent this year.

Although this ruling relies in part on the unique provisions of Arizona’s constitution, the case may serve as a warning that states cannot attempt to ameliorate budgetary problems by shifting more of the costs of pensions to current employees.