I reproduce an article that I
came across in internet which indicates that in a good number of states
in USA,pensions are treated as contractual obligations and treated as
property that needs protection.
Greetings.
C H Mahadevan
How Are Pensions
Protected State-by-State?
Over the last century, states have
adopted the idea that pensions are a form of deferred compensation and, along
with that change, has come certain protections.
by Liz Farmer | January 28, 2014
Pensions both public and private
started out as a worker’s perk – a gratuity that could be amended or removed
entirely at any time. But over the last
century, that perception has given way in most states to the idea that pensions
are a form of deferred compensation.
Along with that change has come
certain protections via either specifically in state constitutions or through a
court’s interpretation of the constitution. Nearly all states have some kind of
protection for pensions. Most (41) protect pensions
under contract theory which prohibits states from passing a law that impairs a
contract, whether public or private.
Some states (seven) have a
constitutional provision that specifically states that public pension plans
create a contract between the state and participant (employee) although the
protections vary state-to-state. Michigan, for example, has a
constitutional provision that protects benefits accrued to date while Illinois’
constitution says accrued and future retirement benefits are protected. These
kinds of specific protections make it impossible (barring extreme
circumstances) to change an employee’s retirement benefit. This rigidity is why
unfunded pension liabilities in these states (Illinois in particular) are so
alarming – because the law essentially prohibits the legislature to making any
changes that could decrease that liability. The law only allows for changes to
future employees, whose benefits are of course not included in that unfunded
liability.
There may be an exception. In
Detroit, a federal bankruptcy judge ruled that city’s pension debt was eligible
for haircuts – a ruling that stated federal bankruptcy law (where contracts can
be impaired) trumps state law. That ruling is being appealed but in any case,
would only apply to cities in bankruptcy.
In most other states (34),
court rulings have inferred intent to create such a contract although when the
protection starts and what it entails varies from state to state. In California, for example, court rulings in the 1950s have led to
what’s called the vested rights doctrine. “The state supreme court determined
that when you essentially enter public employment and you are told that a term
of your compensation is a certain benefit when you retire, that you go into
your employment … you’re entitled to the benefits you were promised when you
started working,” says Teague Paterson, a partner at Beeson Tayer Bodine in
California and an expert on labor law.
Therefore state courts in
California have been more receptive to the argument that pensions as contracts
can’t be impaired. A Santa Clara County Superior Court
judge ruled late last year that San Jose, which had implemented voter-approved
pension cuts in 2012, was not allowed under California law to require its
employees to contribute an additional 16 percent of their paychecks toward
their pension or be forced to opt for a less generous plan. (The judge did
rule, however, that paycuts in order to manage future benefits payments was
legal.)
Fewer states (six) take the
approach that pensions are protected as a matter of property. Property cannot be taken away without
due process according to the U.S. Constitution. Still, these states have
generally had success at amending pension benefits, notes the Center for
Retirement Research’s Alicia Munnell. “Courts have generally found amendments
to public pension plans to be an ‘adjustment to the benefits and burdens of
economic life’ rather than the taking of private property without just
compensation,” she writes in Legal Constraints on Changes in State and Local
Pension Plans. “Thus, state officials have much more freedom to adjust pensions
in states that have taken the property based approach to pension rights.”
Minnesota is an outlier – it is the only
state that protects pensions under the promissory estoppel theory: the
protection of a promise even where no contract has been explicitly stated.
Lastly, only Texas and Indiana still
apply the gratuity approach to pensions and there are still caveats. In Texas,
state plans are subject to change but locally-administered plans are protected
under the state constitution. And Indiana’s Indiana, “the gratuity approach is
followed only with respect to involuntary or compulsory plans, where the
employee has no choice regarding whether to contribute to the plan or keep the
compensation,” says the University of Minnesota Law School’s Amy Monanhan in
her paper outlining the legal framework for pension protections.
In all, 21 states protect
past and future pension benefit accruals via contract or another theory of law. Though states and localities continue to test those boundaries, the
protections on the whole make it very difficult for governments (outside of
limiting cost-of-living increases) to reduce any unfunded liabilities they may
have accrued. Munnell notes that such a structure has led to new employees
taking on much of the financial burden of retirees via far less generous
benefits. She advocates changing the definition of the employer-employee
contract to one that is created when the service is performed, meaning only
accrued benefits would be protected. “Such a standard,” she writes, “would be
much clearer than the morass of provisions that currently exists across the
states, would enable state officials to undertake needed reforms, and would put
public sector workers on an even footing with those in the private sector.”
