Administration

Cities Do Not Have Relief for Troubled Pensions in All States

In many states there are legislative limits to what municipalities can do to get relief for their troubled pensions, but David Godofsky, with Alston & Bird, describes some options.

By Rebecca Moore editors@plansponsor.com | June 15, 2017
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Recently, both Dallas and Houston sought and received legislative relief for their troubled pension funds.

David Godofsky, partner in Alston & Bird’s Employee Benefits & Executive Compensation Group, who is based in Washington, D.C., explains that in both cases the cities were allowed to reduce certain future pension benefits and increase employee contributions.

For example, in Houston, the legislative relief reduced the future cost of living adjustments (COLAs) to pensions. There were different COLAs for different groups of retirees, but those with best were getting 3% per year, not compounded, but based on the original balance at retirement. The COLA is now based on investment returns of the pension fund. According to Godofsky, if a fund has a five-year average return of 5% or less, there is no COLA. If the average return is between 5% and 9%, the COLA is half of the rate of return over 5%, which caps out at 2%. “This is a pretty big reduction if you consider the loss of the compounding effect,” he says.

Also in Houston, they’re requiring active employees to contribute more, using a complicated structure of what certain retirees are contributing. In Dallas, they are asking active employees to contribute more, and future benefits for people who retire have been reduced.

These kinds of reforms would be illegal in some states, Godofsky notes. The rules are different in various states; many have detailed pension protections in state constitutions, and say specifically that pension benefits will be protected. These states include Alaska, Arizona, Connecticut, Delaware, Hawaii, Illinois, Kentucky, Louisiana, Massachusetts, Michigan, New Mexico, New York and Texas.

He explains that these protections vary from state to state. In some states, once you hire an employee, you cannot change the pension benefit adversely even for those pensions not yet accrued. In some states, there might be protections for benefits earned but not for those yet to be reaped, and in others, there are protections for benefits earned and for those employees eligible to retire. Texas has limited protections; they only apply to certain municipal plans and some cities are exempt.

NEXT: Contract clauses can limit what municipal pensions can do

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