Judge Strikes Down Baltimore’s ‘Unconstitutional’ Pension Reform

(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. 

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.