Controversial Cost Containment: Chattanooga's Pension Cuts Don't Bode Well

The City of Chattanooga is hurtling down a path toward pension "reforms" that the City of Knoxville and Knox County have concluded are forbidden.

With Mayor Andy Berke leading the charge, Chattanooga's Fire and Police Pension Board has approved cuts in retiree benefits and increases in employee contributions to its pension plan. All this in the name of putting the brakes on the escalation of pension costs that are the bane of local and state governments throughout the land.

The benefit cuts mainly take the form of reducing the pension cost-of-living adjustment (COLA) to which retirees are entitled from 3 percent to an average of 1.5 percent for a period of years. At the same time, employee contributions to the Fire and Police Pension Plan would be increased from 8 percent of salary to 11 percent in three yearly steps.

In enlisting unanimous City Council approval of these and other plan amendments on first reading last week, Berke claimed they would avert a $5 million increase (to $16 million) in the city's pension costs in the fiscal year ahead and save the city more than $200 million over 25 years, thus avoiding the need for a tax increase.

When the City of Knoxville and Knox County were addressing ways to deal with their burgeoning pension costs in 2012, the attorney for Knox County's Pension Board, Bill Mason of Kennerly Montgomery, advised in a memorandum that, "In our opinion, it would be difficult to sustain an argument that the current COLA features could be eliminated or modified for officers who have already retired. Similarly, it seems legally risky for us to try to eliminate the current COLA provisions applicable to that portion of an officer's pension that is accrued and vested on the date of the amendment."

That advice was based on a Tennessee Supreme Court decision in a landmark case known as Blackwell in which the court ruled as follows: "Public policy demands that there be a right on the part of the public employer to make reasonable modifications to an existing plan if necessary to create or safeguard actuarial stability, provided that no then accrued or vested rights of members or beneficiaries are thereby impaired."

In the end, both Knoxville and Knox County opted to reduce benefits only for new hires (although they probably could have done so also for employees who had not served the five years necessary to become vested in the existing plan). The state took the same course last year with modifications of the Tennessee Consolidated Retirement System that created a "hybrid" plan for new employees patterned after the one Mayor Madeline Rogero crafted for Knoxville in 2012.

Blackwell didn't explicitly preclude an increase in employee contributions to a public pension plan. But the state attorney general has so opined with respect to vested employees—unless they consent to the increase. While Berke has managed to hoodwink a surprising number of Chattanooga police and firemen into believing that his pension cost-reduction measures are legitimate, many others are opposed. And the opponents are almost certain to sue to prevent them in what could prove to be protracted litigation.

When asked if he believes the city's changes will hold up in court, counsel to the Fire and Police Board, Bill Robinson, equivocates by saying, "We just don't know. Some states have ruled this way; and some states have ruled that way. So we just don't know."

However, in Tennessee, the State Supreme Court has already done so. And the crafters of the Chattanooga Fire and Police Pension Plan didn't include the one proviso that might have allowed some wiggle room: namely, a provision for subsequent modification of benefits. Instead, the plan mirrors Blackwell in stipulating that any amendment "shall not in any way decrease any vested benefits accrued by any participant or beneficiary."

Unlike Knoxville, where the city's pension plan is embedded in its charter and can only be amended by referendum, Chattanooga's can be amended by a vote of City Council. The ordinance to do so, on which Council is due to take final action next week, would take effect on July 1, presumably enabling Berke to avoid the $5 million increase in city contributions for fiscal year 2014-15 that would otherwise be required.

But the City of Knoxville's law director, Charles Swanson, ventures that, "The more prudent thing to do is continue your contributions until you get the issue resolved in court because if you didn't and you lost, then you'd really be in trouble."

Of course, if Berke should somehow happen to prevail it could have major ramifications for Knoxville and the rest of the state. However, in no event does Knoxville's chief policy officer, Bill Lyons, foresee an increase in the 6 percent of salary contribution that city employees make to their pension plan.

An important difference between the two cities is that Knoxville's employees participate in Social Security and pay 6.2 percent of their salaries to do so, whereas Chattanooga's are excluded from it. "Their not being in Social Security makes everything different," Lyons says.

My own sense that the big pension cost increases that Knoxville is facing are ever so likely to continue unabated regardless of the Chattanooga outcome.