SAN FRANCISCO - Two rulings from Washington's state Supreme Court in favor of the state's ability to reform certain pension benefits are a credit positive for the state and its local governments, according to Moody's Investors Service.
The companion rulings will allow the state to prevent its pension contribution from growing an additional $616 million for the 2015-17 biennium, and local governments to prevent their contributions from increasing by a combined $570 million, according to the Office of the State Actuary.
"Had the court ruled against the state, employer contributions could have risen 20% to 52% above the contribution rates recently adopted by the state legislature, depending on the specific plan," Moody's analyst Tom Aaron wrote in a report released Sept 5.
The Supreme Court's rulings on Aug. 13 overturned lower court rulings in companion cases, deciding that 2007 and 2011 state legislative actions to repeal certain pension benefits were legal.
The high court found that the state can repeal certain benefits without impairing a contract, providing the legislation that created the benefits gave the state an option to end them.
The 2007 and 2011 actions repealed a 1998 "gain-sharing" benefit for certain groups of employees in the Public Employees Retirement System, Teachers' Retirement System, and School Employees' Retirement System.
Gain-sharing provided benefits to employees if plan investment returns hit certain targets. Benefits included increased cost-of-living adjustments or lump-sum retirement account credits.
In response to escalating costs, the state repealed the gain-sharing benefits in 2007 and 2011 on a prospective basis for current and future employees.
A lower court ruled in favor of labor groups that filed lawsuits against the state—a decision that was recently overturned by the state's Supreme Court.
Washington is the latest example of a state Supreme Court deciding a legal challenge to pension reform. The Arizona Supreme Court recently upheld a lower court's ruling striking down reforms to cost-of-living adjustments for judges and elected officials. State supreme courts in New Mexico and Florida ruled that reducing cost-of-living adjustments is legal.
In California, a lower court deemed illegal key provisions in a series of pension reforms for San Jose city workers approved by voters in 2012. The provisions included a prospective reduction to future benefit accruals for current employees.
The city decided to appeal the ruling in June 2014.
