The New York Times reports on a major change that could impact holders of public pensions, a kind of opening of the floodgates for those who want to slash the benefits that public employees earned throughout their lifetimes.

Judges in Colorado and Minnesota have dismissed court challenges by retired public workers whose pensions had been cut — developments that may embolden other states and cities to use pension reductions as a tool to help balance their budgets.

The two lawsuits sought to reverse reductions in the cost-of-living adjustments that Colorado and Minnesota had previously promised to retired public workers. Generally speaking, once lawmakers have agreed to provide certain pension benefits to public workers, it is difficult, if not impossible, to roll them back because of protective language in state laws and constitutions and years of court interpretations […]

In their court filings, retirees in Colorado and Minnesota had argued that their benefits were contractual in nature, and therefore protected by state and federal constitutional language barring the impairment of contracts.

However, in his ruling dismissing the Minnesota case, Judge Gregg E. Johnson of the state’s Second Judicial District Court wrote that the retirees in that state “have not met their burden to show unconstitutionality beyond a reasonable doubt.”

You can see how this would lead to pension cuts across the board, as every city and state needing revenue would look to that as an attractive option to close a budget gap. Again we’re talking about inflation adjustments here, as with the chained CPI. But if you can change the contractually obligated COLA, it’s a hop skip and a jump to changing the core benefit as well.

Dean Baker writes:

In effect the courts were saying that contracts with workers do not have the same standing as other contracts. It is almost inconceivable that the courts would allow a state government to unilaterally cut its contracted payments to a supplier or other government contractor […]

It is worth noting that government officials have openly pushed the sanctity of contracts in other contexts. For example, when he was head of President Obama’s National Economic Council Larry Summers argued for the importance of the sanctity of contract in the context of the bonuses going to AIG executives. Many of the top executives of the company, which was saved from bankruptcy by a massive government bailout, had bonuses that ran into the billions of dollars.

It is likely that the vast majority of the public did not support giving bonuses to these executives. (Bankruptcy voids contracts.) However, these bonuses were paid.

Likewise, those who want to pit one class of workers against another may get those without a pension to disagree with the idea of pension payouts with a cost of living adjustment. But it’s a contractual obligation. If we’re going to honor that in cases of Wall Street executives, we should honor it for public employees.

But now the courts are chipping away at even that.

David Dayen

David Dayen