PHOENIX — A 2011 state law requiring employees to pay more into their retirement plans is unconstitutional, the Arizona Supreme Court ruled Thursday, meaning higher future expenses for state and local governments.
In a divided ruling, the justices said when judges took the bench they were told they would have to contribute 7 percent of their earnings to the Elected Officials Retirement Plan. Acting Supreme Court Justice Randall Howe, writing for the majority, said that became part of their contract with the state.
What that means, Howe said, is the state could then not unilaterally boost the judges’ contribution to 10 percent in 2011 rising to 13 percent two years later, even if lawmakers said that was necessary to maintain the financial stability of the pension fund.
The case affects more than those judges on the bench as of 2011 when the law changed.
It also means refunds of about $220 million to about 26,000 state and local police, firefighters and corrections officers who are in other government-run pension plans that made similar hikes in employee contributions — hikes that Thursday’s ruling found illegal.
What remains to be decided is how the pension funds make up the money they have to refund. They could assess the government employers retroactively or simply boost what the employers have to pay in the future to make up the money.
Employees have no financial reason to let the pension funds keep the extra money. Their retirement benefits are based on a percentage of their salaries, a figure unaffected by how much they contributed during their working years.
Joyce Garland, the chief financial officer for the city of Tucson, said she does not know what the ruling will cost taxpayers — or when. She said when the high court struck down another change in pension laws two years ago the city was given several years to pay off the additional funds needed. (See related box on Page A4)
Doing nothing about the loss is not a likely option.
Christian Palmer, spokesman for the three affected funds, said the ruling adds $1.3 billion in unfunded liabilities to the retirement plans, which have assets of about $8 billion but liabilities of $16 billion.
Thursday’s ruling drew a stinging dissent from Justice Clint Bolick who insisted there is no contract between the government and its workers on pension contributions. He called the concept “a work of legal fiction to which the likes of John Grisham could only aspire.”
And Bolick said while Thursday’s ruling “portends a huge financial windfall” for those who will get back the money, it is “a burden the taxpayers will shoulder.”
As it turns out, Bolick is the only actual member of the Supreme Court to have a voice in this case.
The other four justices disqualified themselves as they were on the bench when the 2011 law was approved and have a financial stake in the issue. Bolick was appointed earlier this year; the other four who heard this case are judges from lower courts who were named since 2011.
This is the second financial setback in as many years for the retirement plans.
Two years ago the justices — the actual ones — struck down another provision of the same law that reduced automatic cost-of-living increases for retired judges.
At the heart of the dispute is a provision in the Arizona Constitution that says that “public system retirement benefits shall not be diminished or impaired.”
Howe said that was not a problem in the 1990s when the retirement system was generating high returns. But he said decisions to invest in tech and telecommunications companies “made the plan vulnerable to major financial shocks.”
By 2011, he said, the plan’s assets were just 62 percent of liabilities, down from 121 percent in 1998.
That year, in a bid to fix the problem, lawmakers made two changes.
One was that now-overturned future cost-of-living increases. Thursday’s ruling involves the mandate that judges put more into the pension fund.
Two judges sued on behalf of themselves and others to strike that down.
Howe said lawmakers acted improperly.
“The law in Arizona has been clear that public employees are contractually entitled to the retirement benefits specified in their initial employment contract,” he wrote for the majority. And Howe said that contract includes not just how much they get when they retire but also how much they have to pay to get those pension benefits.
Bolick, however, said even if there was a contract between the state and the judges and other employees it could be voided because it was based on the “mutual mistake” of how much the retirement funds would be earning to cover the cost of future pensions.
Thursday’s ruling does not affect the much larger Arizona State Retirement System with its more than 211,000 active state and local state workers and teachers. It’s formula requires employees to match employer contributions on a 50-50 basis, a ratio that has remained the same.