State and local pension benefits and the agencies that administer them are established under, and must comply with, state and local statutes, as well as public policies and procedures, and applicable federal tax qualification, investment, age discrimination and other requirements.
The past few years have brought about an increase in litigation activity surrounding state and local pensions. Legal challenges have pertained primarily to benefit modifications and/or the process by which they were made. Other areas of litigation have surrounded investments, benefit taxation, changes in plan design, and other issues.
Pension benefits for employees of state and local government generally are protected by either constitutional or statutory provisions or case law. Levels and types of protections vary by state and are considered by some to be unclear or uncertain in some cases.
Two clauses in the US Constitution that are often cited as protecting pension benefits include:
Article 1, Section 10 (clause 1), known as the Contracts Clause. It states that,
No State shall enter into any Treaty...impairing the Obligation of Contracts
The Fifth Amendment contains the so-called Takings Clause:
"No person shall be ... deprived of life, liberty, or property, without due process of law ..."
Chapter 9 of the United States Bankruptcy Code is uniquely designed to ensure a municipality can continue to provide essential public services while debts are reorganized. Chapter 9 filings are actually very rare: Only 14 localities, or one out of every 1,525 eligible localities (0.06 percent), have sought bankruptcy protection over the past five years. Only 12 states specifically authorize Chapter 9 filings for their general-purpose local governments, 12 states conditionally authorize such filings, while 26 states either have no Chapter 9 authorization outlined, their laws are unclear, or such filings are otherwise prohibited.
Pension and/or health care benefits earned by retired employees and active vested employees are a consideration in some municipal bankruptcy proceedings. Each jurisdiction that enters into such an agreement does so under a unique circumstance, and there is no broad basis for determining how accrued benefits should be treated as part of a larger post-bankruptcy plan.
In Stockton, CA, the judge overseeing the city's bankruptcy proceedings issued a ruling stating that the city may modify worker pensions as part of its plan to exit bankruptcy. The city instead elected to preserve pension benefits for retired workers in lieu of modified pensions for new employees and reductions in retiree health benefits. (Opinion - United States Bankruptcy Court - Eastern District of California, filed February 4, 2015)
Summary of Public Pension Legal Rulings, NASRA (case summaries organized by state and by topic, members-only)
State Info on Constitutional Protections and Authorizing Statutes (see each state page)
Roll Call Litigation (members-only)
State Fiscal Constitutions and the Law and Politics of Public Pensions, Amy Monahan, May 2014
Public Pension Plan Legislative and Judicial Roundup, Buck Consultants, April 2014
County Can't Challenge Ruling That Its Retirement Plan Mistreated Older Workers, Bloomberg BNA, November 4, 2014
Understanding the Legal Limits on Public Pension Reform, Amy Monahan, American Enterprise Institute, May 2013
A Legal Guide to State Pension Reform, Jennie Herriot-Hatfield, Amy Monahan, Sarah Rosenberg and Bill Tucker, February 2012
Legal Constraints on Changes to State and Local Pensions, Alicia Munnell and Laura Quinby, Center for Retirement Research, August 2012
Municipal Bankruptcy: Standard & Poor's Approach and Viewpoint, Standard & Poor's, October 2012
Q&A on Municipal Bankruptcy, California Legislative Analyst's Office
Summary of CalPERS Legal Position on Municipal Bankruptcy, As Delivered to the CalPERS Board of Administration, September 2012
Bankrupt Cities, Municipalities List and Map, Governing Magazine
Why Municipal Bankruptcy is Rare (and Should Be), Governing Magazine, August 2013
How Are Pensions Protected State-by-State?, Governing Magazine, January 2014