11th Cir. Upholds Hike in Pension Contributions

     (CN) – Gadsden, Ala., did not violate its firefighters’ employment contract by raising their required pension contribution from 6 to 8.5 percent to finance the city’s unfunded pension liability, the 11th Circuit ruled.
     “This case presents a problem common to most cities in the United States,” the 25-page opinion begins. “Their pension funds have been operating at a substantial loss, and the cities’ long term liabilities are becoming unfunded at an exponentially increasing rate. That is, the contributions employees and cities are making to pension funds – as a percentage of the employees’ salaries – are being used to pay the pensions earned by retirees instead of being set aside and invested for employees’ retirements.”
     In 2011, the city’s pension program had an unfunded liability of $50.9 million, and anticipated that it would have to pay 24.5 percent of employees’ compensation out of public funds, leaving it with a $1.5 million shortage in its proposed budget for the following year.
     With its back against the wall, Gadsden raised its employees’ pension contributions by 2.5 percent. The decision closed the city’s budget gap by $500,000.
     A class of city firefighters, whose contribution rate was raised from 6 percent to 8.5 percent, sued the city for allegedly breaching their employment contracts.
     But a federal judge dismissed the suit, finding no contractual breach, and the 11th Circuit affirmed Tuesday.
     “Despite ample discovery, no party has produced the written agreement between the firefighter-employees and the City, nor is there much evidence about what the terms of such a writing might contain,” Judge Gerald Tjoflat said, writing for the three-judge panel.
     Once employees have retired, the benefits to which they are entitled may not be reduced, under Alabama law. But until that time, the city may amend employees’ interest in the retirement plan, the court said.
     “Plaintiffs argue that Gadsden firefighters who have complied with the statutory requirements possess a ‘vested’ right to a 6 percent employee contribution rate. This argument relies on the assumption that there exists an implied promise not to raise the employee contribution rate once a firefighter becomes eligible for retirement benefits. We can find neither hide nor hair of such a promise,” Tjoflat said.
     There is a “well-worn” distinction between pension benefits and pension obligations, the court found.
     “Nothing in the challenged legislation divests plaintiffs of their earned pension benefits. Instead, the increased contribution rate simply reduces plaintiffs’ anticipated compensation by deducting an additional 2.5 percent from their future take-home pay,” the judge said.
     Attorneys for both parties did not immediately return a request for comment.

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