October 27, 2011

Are Public Employee Pensions Part of or Above the Law?

Carroll Andrew Morse

I attended the final few hours of last night’s House/Senate pension reform public testimony session. While I was there, the great bulk of the testimony was from public union members and officials, repeating variations on the theme of yeah it's a mess, but the young folks have plenty of time to figure out how to pick up the pieces of the mistakes we’ll leave behind and the important thing is that I get mine. Describe the Raimondo/Chafee plan with analogies to theft was common: "picking our pockets", "stealing from union members", etc. In other places, I've seen the Raimondo/Chafee pension reform plan described as "larcenous".

But something can only be stolen from someone if it belongs to them in the first place. So what, exactly, do Rhode Island's public union members think that they own that is being taken from them? Given that the contributions from salary made by RI public employees aren't nearly enough to provide the benefits they currently demand, and their employer raises money mostly through taxation, the only answer is that the state’s public union members have convinced themselves that they own a piece of the future incomes of every citizen of Rhode Island -- even of those yet to be born. This is wrong, on both legal and moral levels.

Limited, democratic governments have no authority to give one group of people permanent and unlimited ownership of the incomes of others. Government has no right to designate "owners", who are free to take as much each year as they say they need from the "owned", with the "owned" being allowed no recourse whatsoever to change the terms of their inferior position. Specifying that relationship in contractual form (or just calling it an “implied unilateral contract”) does not make it a proper use of government power. You could write up something that looks like a contract to sell your neighbor's house to a third-party, but it would mean nothing, because you can't sell, give-away or transfer what you don't own. Likewise, government does not “own” all of society. Government only "owns" the portion of the citizens’ livelihoods and property that representatives accountable to the people decide upon, in an appropriations process that must be renewed and reviewed in a reasonably time-limited budget cycle. This understanding of the limits on what government actually possesses has been a fundamental check on tyranny and absolutism for over 300 years.

This principle is reinforced in Rhode Island law, which explicitly states that no contractual obligation in a municipal public employee contract can extend beyond three years. So how does this get reconciled with claim that past municipal employee contracts bind specific COLA structures 20 years or more into the future? Easily enough! For those willing to assert that union claims on the incomes of others are higher than and untouchable by the law, the first principle of government is that a small group of people are the real owners of the property and livelihoods of everyone else -- but that this is not a cause for worry, because everyone will get a voice in government regarding other matters, after this first order of business is taken care of.

The major problem here, of course, is that such a practice is not consistent with democracy. A democracy cannot accept -- and certainly cannot create -- special classes of people who hold a super-legal position over the rest, entitled to special laws and appropriations all their own, which are unalterable by the people and their representatives.

It remains to be seen if we will have such a class of people in Rhode Island.

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Article I, section 10, clause 1 of the Constitution provides that “No State shall … pass any Law impairing the Obligation of Contracts.”

Unfortunately, and however they were created, union members have a contract with the state. They have as a valid a claim against the public treasure as does a road builder who contracts to repave a state highway.

There are probably 250 decisions on the "contracts clause", so there may be a "loophole" in the "sanctity of contracts". But, I do not know of it.

Whose fault? We kept electing those people. In a democracy, what greater affirmation of their activities? Now we pay the price of indolence.

Beat feet.

Posted by: Warrington Faust at October 27, 2011 2:58 PM


You could sign a contract with a private party who promises to get you a certain amount of something. If the private party promises more than he can legitimately deliver, and acts illegally to obtain what it is that he owes, there's no immunity based on the claim that it would have impaired a contract not to have allowed outside-of-the-law activities.

Same is true of government. Contracts cannot be used to supersede or override appropriations or other parts of the law.

Posted by: Andrew at October 27, 2011 3:51 PM

I am sympathetic to the underlying ideals of this post, but I doubt its legal validity. There is no question in my mind that a contract exists between the state and its pensioners. There was clearly an offer made, acceptance of the terms, and consideration between the parties. The real absurdity of the union argument lies in their claim that that contracts constitute a death pact between the parties and can never be altered, even under the most extraordinary or morally questionable circumstances (both present in Rhode Island). Their argument, shouted the loudest by those who are most ignorant, is legally wrong and flies in the face of hundreds of years of well-established and respected contract law. As this post does rightly point out, the fact that many of the "debtors" have yet to be born adds a whole new dimension of immorality to the elaborate ponzi scheme the unions conspired with bought politicians over decades to concoct in their mutual favor.

Posted by: Dan at October 27, 2011 3:57 PM

"The major problem here, of course, is that such a practice is not consistent with democracy. A democracy cannot accept -- and certainly cannot create -- special classes of people who hold a super-legal position over the rest, entitled to special laws and appropriations all their own, which are unalterable by the people and their representatives. "

I think the oligarchs who control the financial industry that have not been made to pay for their white collar crimes which caused this Great Recession/Lesser Depression constitute a special class of people who hold a super-legal position over the rest. The government bailed them out!

Posted by: Anonymous at October 27, 2011 4:02 PM

"I think the oligarchs who control the financial industry that have not been made to pay for their white collar crimes which caused this Great Recession/Lesser Depression constitute a special class of people who hold a super-legal position over the rest."

Not without a little help from your progressive friends.

Posted by: Max D at October 27, 2011 4:35 PM

Please do not understand that I particularly favor the unionized employees.

The terms "democracy", "voters", "unborn" are thrown around here. In truth, they are all subsumed into "government". We long ago decided on a representative democracy. That "government" can make contracts and cannot simply walk away from them. By electing, and re-electing, that "government"
we have affirmed their actions.

I think the best we can do is take a position that the madness stops now. The only legal alternative I know of is some form of bankruptcy, I don't think that is available to state governments.

If we void the contracts, what do you think bond purchasers will think of the "full faith and credit" that they rely on? We will just be another "Banana Republic".

We have put ourselves in a bind. Let's not blame the politicians, they are only there for the money. We are the ones who transfer power to them.

Posted by: Warrington Faust at October 27, 2011 5:54 PM

Posted by Anonymous
"A democracy cannot accept -- and certainly cannot create -- special classes of people who hold a super-legal position over the rest, entitled to special laws and appropriations all their own, which are unalterable by the people and their representatives. "

That is just wishful thinking that flies in the face of the reality we have created. Has everyone failed to notice that we have created "royalty" in the form of Senators. Private subways, private gymnasiums, private barber shops, cars, drivers, etc. etc. Do you think lesser politicians don't want a piece of that. "We deserve it, don't we". Being forcefully shoved about by a State Policeman to make way for a Governor brought this home to me.

Posted by: Warrington Faust at October 27, 2011 6:03 PM

Here's an explanation of how the state can override a contract (not that all pensions are necessarily contracts.) It hinges on the solid limited government foundational principal that one legislature cannot unreasonably tie the hands of a future legislature.


Posted by: Govanni Cicione at October 28, 2011 10:32 AM

By Andrew's and Mr. Cicione's logic we should just fix the problem by paying the bond holders say 1/2 the percentage agreed to... or are the banks and other institutional investors a special class of (immortal) citizens?

Posted by: Russ at October 28, 2011 11:58 AM


Since you obviously missed it the first time around, here's my post on why I think the new Rhode Island law making bondholders into a privileged class with a "first-lien" on tax revenue is a bad idea. t.co/Py99NxGJ

Some of us do take this limited-government democracy stuff seriously.


I actually think we're actually pretty close in what we're saying, but approaching the elephant from different angles.

Consider an extreme case: we wouldn't let a state create a 30-year employment contract (with 3% COLAs) for a "friend of the Governor", even though such a contract is theoretically possible between private parties. The reason, as Gio says above, is that there are fundamental limits in a limited-government democracy to how much of the future we let current governments incontrovertably dictate.

However, in Rhode Island right now, the unions are saying they should be allowed the kind of long term contract described above *that wouldn't be allowed to any other organization in society*. This is the very definition of a privileged class.


I'll respond to your comment in an upcoming post. You've raised the basis of a very deep discussion.

Posted by: Andrew at October 28, 2011 1:09 PM

That's true. The rationales both come down to reasonableness. I would argue as a semantic point, and maybe we're in agreement, that it's not that state legislatures *can't* enter into these ludicrous 50-year+ contracts with individuals - they can - but such contracts can legitimately be invalidated or modified by the judiciary down the line when they become untenable, or even just unduly burdensome. As long as the legislature isn't literally stripping the legislative power from future general assemblies, I don't see any inherent constitutional problems with these contracts.

Posted by: Dan at October 28, 2011 1:29 PM

Well, good and no I hadn't read that one (skimmed it just now). But the reality is the discussion is entirely focused on the two options of cuts in services or cuts in retiree benefits.

h/t easyeyall at RIF for this link on that subject:



Posted by: Russ at October 28, 2011 1:43 PM

Russ - If the bondholder costs were rising exponentially and bankrupting the state, then yes, the contract could very well be restructured in such a manner.

Posted by: Dan at October 28, 2011 2:09 PM

"If the bondholder costs were rising exponentially..."

I thought the problem was chronic underfunding of the plan coupled with a tanking market. I think you're maybe confusing this with healthcare costs?


By the logic you present, underfunding was the cause therefore increased funding should be the solution. Just saying.

Posted by: Russ at October 28, 2011 3:41 PM

Not really, no. The central problems are that people are living much longer than they used to, which wreaks havoc with the exponential COLA growth built into the benefits, and the rampant abuse of disability pensions. Also, the "dueling pensions" of people who work for the state and then a municipality don't help.

I don't know where you think this magic money should come from. Producers are already fleeing the state. If the pension system had been fully funded there would have been no money for anything else.

Posted by: Dan at October 28, 2011 4:46 PM

"I don't know where you think this magic money should come from."

That's the question no one can seem to answer. Re-amortizing only kicks the can down the road yet again - and at a multi-billion dollar price.

Posted by: Monique at October 28, 2011 5:49 PM

I love this thread! The end game in RI has finally arrived, in all its venom and confusion. At long last, the majority appears to realize what a minority (most of who left the state) realized long ago -- you can't be anti-business, offer some of the nation's most generous social safety net programs, and some of its most lucrative public sector pensions and not expect the system to collapse at some point. For years, the system has rested on an uneasy alliance between progressives and public sector unions that is now coming apart at the seams, as it becomes clear that neither bond investors nor the taxpayers are willing or able to finance its exploding costs. Athens on the Narragansett indeed!

This is where things finally get interesting. While the rhetoric is easy, the mathematical reality is that raising taxes on "the rich" can't solve the problem -- even if they were set at 70% or more. So it is not surprise the unions now want to overturn last year's legislation giving bondholders preferential access to public sector tax revenues. I like to think that with Argentina and Greece as precedents, it is just a matter of time before RI's increasingly desperate Democrats attempt to force the bondholders to "pay their fair share" or "accept their fair share of the sacrifice" being made by "everyone."

In the meantime, it is no surprise that the unions are going after Gina with everything they've got -- with her NYT statement that she thought the moral imperative was to support social programs while supporting pension reform, she has revealed herself, or at least allowed herself to be painted as in the progressive camp. Yet the rest of that camp, so vocal for so many years in RI, has been strangely (though predictably) silent on the pensions issue. Where are Kate Brock and Kate Brewster when you need them? Besides offering wholly predictable demands to raise taxes on the risk and on businesses, what solutions have they offered to the crisis engulfing the state?

RI, once again, is but the canary in the coal mine for what Walter Russell Mead calls the decline and fall of the Blue State Model. This is a show loaded with colorful characters (far more so than you'd find in Vallejo or Harrisburg or San Diego) that has been too long in arriving on the national media stage. Forget about the Jersey Shore or Sopranos -- RI is going to give the nation hours of gripping reality TV in the months ahead. My bet is that Flanders will emerge as the star of the show. Stay tuned.

Posted by: John at October 29, 2011 2:37 PM
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