Judge Strikes Down Baltimore’s ‘Unconstitutional’ Pension Reform

The Baltimore Fire and Police Retirement System may be once again on the hook for tens of millions in annual payouts that had been cut in a 2010 reform package.

(September 24, 2012) – A federal judge has overturned a key provision of Baltimore’s 2010 pension reform, calling changes to the cost-of-living adjustment “unconstitutional” and not “reasonable and necessary to serve an important public purpose.”

“There was an important public purpose to be served by the restructuring of the Plan so as to restore it to actuarial soundness and sustainability,” Judge Marvin Garbis wrote in his ruling. “Hence, the City’s impairment of Plaintiffs contract rights, including their rights to the Variable Benefit feature, could be Constitutionally valid if ‘reasonable and necessary.’ However, the City did not have total freedom to disregard its contractual obligations altogether.”

The city’s police and fire unions challenged Mayor Stephanie Rawlings-Blake’s 2010 reforms in court, in the press, and on picket lines in front of City Hall.

To close the Baltimore Fire and Police Retirement System’s $121 million deficit, the city council had passed legislation increasing the years of service required of new hires for pension eligibility, fixing the annual cost-of-living adjustments at 1% and 2% for current and future retirees, hiking employees contributions from 6% of pay to 10%, and calculating benefits based on members’ average salary over the last three years, not 18 months. The mayor’s ordinance also stipulated that the City of Baltimore boost its contribution by about $20 million year-on-year.

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Mercer consultants estimated that this package of reforms would reduce unfunded liabilities from $1.28 billion to $1.16 billion, despite adjusting the assumed rate of return from 8.25% down to 8%. Post-overhaul, Mercer calculated, Baltimore’s police and fire pension fund would be 88% funded, up from 84.8%.

In his ruling, Garbis agreed with a reworking of the Baltimore pension system in theory, but concluded that replacing the variable cost-of-living adjustment with a fixed annual increase unfairly impacted young employees.

“While the City was justified in acting to stabilize the actuarial footing of the Plan, the Ordinance scheme was not ‘necessary,’ in the sense that the impairment far more drastically impaired the contractual rights of some Plan members than others while a perfectly evident, more moderate and even-handed course would have served its purposes equally well,” he wrote.

George Nilson, the administration’s solicitor, told the Baltimore Sun that he was “almost certain” the city would appeal to a higher court.

(September 24, 2012) — The battle for a say on executive pay is set to continue as investors consider it one of the leading ways to protect their rights as shareholders, a survey of the largest asset pools has found.

Some 80% of investors responding to a survey on the issue rated the value of a vote on pay at companies in which they held shares as either important or extremely important, according to consultant Soldali.

The survey took the views of 35 of the world’s largest investors, responsible for $13 trillion in assets.

More than three quarters of respondents said these votes should be taken annually, with two thirds suggesting the vote should be advisory rather than binding.

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In terms of what factors shareholders consider when voting on remuneration packages, the highest overall vote went to “performance criteria for short/medium/long term incentives”, followed by company financial performance.

In the United Kingdom, a so-called ‘shareholder spring’ claimed the scalps of several chief executives as investors voted against remuneration packages. In the United States, large pension funds and other institutional investors rejected pay packages for more than 10 S&P500 company executives.

The survey suggested a company’s board chairman or lead independent director should establish a dialogue with investors who took issue with remuneration packages. More than three quarters said this was the line companies in receipt of a ‘thumbs down’ for its say on pay should take, followed by an instant revision to the remuneration policy. A simple letter of explanation to shareholders received little support.

In a separate report, investment consultant Mercer said remuneration committees should become more pro-active in addressing pay issues within their companies.

The report said: “Mercer believes that pay policy must be communicated clearly in remuneration reports and the strength of the link between pay and performance should be underlined. Specifically, the consultancy believes that in the remuneration report, remuneration committees should provide a clear explanation, in the event that it occurs, as to why executive pay is increasing at a higher rate than that of the employee.”

Despite seemingly leading the charge on governance issues, the Sodali survey found investors considered proxy agencies relatively unimportant to their decision-making concerning say on pay.

The Sodali report said only 5.7% of respondents would “fully trust the analysis and judgment” of proxy advisors, while 57% said proxy advisors were “helpful but they would also review the company’s information and establish dialogue when appropriate.” Just over a third said proxy advisors’ views were “informative only but [they] would trust their analysis when strong misalignments with market practices are highlighted.”

However, a study on shareholder voting in March showed listed companies were taking increasing notice of proxy voting advisory firms when shaping executive pay packages.

A survey by The Conference Board, Nasdaq and The Rock Center for Corporate Governance at Stanford University found ISS and Glass Lewis offered the same advice on votes 75% of the time, offering substantial influence over a company vote.

During the 2011 proxy season, no company that received a positive recommendation from ISS failed its say on pay vote. Some 12% of companies that received a negative recommendation from ISS failed their say on pay vote.