National Association of State Retirement Administrators


Litigation

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 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. 

Benefit Protections

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 ...pass any Law 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 ..."

 Municipal Bankruptcy

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.

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