B udget hawks poring through the record of the 2007 Washington Legislature find little to celebrate. Binge-spending lawmakers went through a $2 billion surplus like high school football players go through an all-you-can-eat buffet. But there was one substantial victory for good fiscal policy. Lawmakers repealed a costly pension supplement known as “gain-sharing.”

Now, that common-sense action – which came at a substantial cost – faces a legal challenge with potentially devastating budget consequences.

Here’s a little background.

Back in 1998 when the stock market soared and it looked like the law of gravity had been repealed, the Legislature handed public employees what they thought was a no-cost, share-the-wealth pension sweetener. In those days, what went up might never come down. Or so it seemed.

The fallacy led to the fiscal time bomb known as gain-sharing, which supplements benefits for active and retired employees in the state’s Plan 1 and Plan 3 retirement systems. The benefit increases are triggered when returns on state pension investments exceed 10 percent over four consecutive years. Instead of having all of the money available to hedge against market downturns and cover future obligations, half of the extraordinary return is used to boost retiree benefits.

No doubt, it’s a good deal for retirees: a temporary surge in investment returns generates a permanent increase in their pension checks. There was no corresponding loss-sharing provision for when investments tank.

At the time, lawmakers believed that the benefit would pay for itself. They were mistaken.

According to a Washington Research Council analysis published in February, continuation of gain-sharing would have cost state and local governments $7.8 billion over the next 25 years. The repeal adopted by the Legislature represents a savings to those governments – that is to say, taxpayers – of $6.7 billion.

The Washington Education Association was the union first out of the gate and into the courthouse. Gov. Chris Gregoire signed the gain-sharing repeal May 15, and the union filed suit later that day. Last Thursday, the Washington Public Employees Association filed its own lawsuit.

No one should be surprised at the unions’ actions. They won the benefit in 1998 and, in their view, there’s never any going back. But they have a couple of hurdles to cross.

When the Legislature set up gain-sharing, lawmakers reserved “the right to amend or repeal” the benefit, further stating that “no member or beneficiary has a contractual right” to it. The attorney general has agreed that lawmakers were not obligated to continue the program.

The WEA, unsurprisingly, argues that the “so-called reservations of rights” are invalid, that the state cannot “retroactively repeal gain-sharing” or eliminate the contractual rights of Plan 1 and Plan 3 members.

Lawmakers erected the second hurdle this year, by including a number of new pension sweeteners (higher cost-of-living adjustments, early retirement at full benefits) to soften the blow of gain-sharing repeal. These new benefits, which cost an estimated $4.4 billion over the next 25 years, would be repealed if a lawsuit succeeded in restoring gain-sharing. The early-retirement provision, in particular, is a good deal for a lot of Plan 2 employees unaffected by gain-sharing, an issue that may cause some union members to think twice about suing.

The WEA claims that the new benefits also amount to vested contractual rights. They went to court to restore gain-sharing and retain the new benefits, an astonishingly audacious action, totally disregarding legislative prerogative, not to mention the best interests of state government and taxpayers.

Give Democrats partial credit for confronting and defusing the time bomb, although they blinked too soon. Hoping to appease the public employee unions with the new $4.4 billion retirement package reduced a possible $6.7 billion savings to a net savings of just $2.3 billion. And in the unlikely event that the unions prevail in court, they’ve simply made a bad deal worse.

Although some employees claim they were misled, the clear language of the original legislation is hard to misconstrue. Even in the giddy days of the stock market surge, lawmakers had the good sense to reserve the right to retreat on the benefit. It’s a rare and laudable instance of fiscal foresight. The courts should honor it and quickly dismiss the unions’ lawsuit.