PUBLIC PENSION REFORMProfessor Jack M. Beermann

Boston University School of Law

Professor Jack M. Beermann

Professor Jack M. Beermann

Introduction

• The Public Pension Crisis: Magnitude and Causes

A. How did the problem happen? Underfunding, increased promises and unreasonable investment projections. Political factors.

B. How big is the problem? $1 trillion-$4 trillion plus. 1. Proper discount rate controversy. 2. The special case of health care. 3. Crowding out of services in the no tax increase environment.

Professor Jack M. Beermann

State Law Constraints on Pension Reform: Funding

• State Law Constraints on Underfunding Pension Liabilities. Most states don’t require full funding; a few do.

• Should states be constitutionally required to fund their pension obligations in full?

• Compare to federal Social Security and other federal systems. Projected unfunded Social Security liability over next 75 years: $10.6 trillion to $25.4 trillion.

Professor Jack M. Beermann

State Law Constraints on Pension Reform: BalancedBudget Requirements

• State Balanced Budget Requirements and Pension Plan Funding:• Underfunded pensions are not considered “deficits” under state

balanced budget requirements.• Stricter balanced budget requirements correlate with higher

unfunded pension liabilities.• Seems like political leaders cannot resist deficit spending.

Professor Jack M. Beermann

State Law Constraints on Pension Reform: Pension Clauses

• EXAMPLE: The Illinois Constitution’s Pension Protection Clause. Similar to New York and other states:

• Article XIII; SECTION 5. PENSION AND RETIREMENT RIGHTS• Membership in any pension or retirement system of the State, any unit of

local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

• The California Rule versus Reasonable Reform (California might not really follow the California rule. Illinois is the next important decision.)

• Pension protection clauses combine with state constitutional contract clauses.

Professor Jack M. Beermann

State Law Constraints on Pension Reform

• In some states, from the moment you become a public employee, you are absolutely entitled to whatever pension and other retirement benefits were promised at the date of employment. (Other states protect only vested benefits.)

• Under California Rule, any change to promised benefits is illegal unless there is some compensatory benefit to the employee.

• In states that apply strict rules like these, reform is very difficult.

Professor Jack M. Beermann

Federal Constitutional Law Constraints on Pension Reform

The main federal constraint on pension reform is the Contract Clause, which prohibits state laws that impair the obligation of contracts.

• Parker v. Wakelin, 123 F.3d 1 (1st Cir. 1997), and basic legal principles under the Contract Clause: Two issues:

• (1) Whether the change in state law results in a "substantial impairment of a contractual relationship” and if so

• (2) whether this impairment is justified as "'reasonable and necessary to serve an important public purpose."

Professor Jack M. Beermann

Federal Constitutional Law Constraints on Pension Reform

• Sovereign Immunity and State Default

• Could a state default and interpose a sovereign immunity defense?

• This is actually a more difficult legal question than you might think.

Professor Jack M. Beermann

Bankruptcy and Pension Reform

• Bankruptcy and Reduction of Pension Obligations• General Principles

• States may not use bankruptcy• State decides if municipalities may use bankruptcy• Municipality must be insolvent (strict definition)• Examples: Detroit and Central Falls

Professor Jack M. Beermann

Alternative Pension Designs

• Defined contribution plans.

• Hybrid plans.

• Place some investment risk on employees.

• Advantages to contribution or hybrid plan.

Conclusion: Reform and Change

• Bailouts and Reasonable Reform

• What would a bailout look like?

• If no reform: pressure to privatization, shrinking government, loss of services.

Professor Jack M. Beermann