Public pensions are “under siege” because of the economic climate, said Eric Madiar, chief legal counsel and parliamentarian in the Office of the Illinois Senate President. It is “politically more palatable to unilaterally cut pension benefits for public employees and retirees than to raise taxes, cut services or both,” he said.
Most estimates indicate that pension plans in many states and municipalities are severely underfunded. David R. Godofsky, partner at Alston & Bird LLP, said the recession in 2008 hurt the funding situation, with some plans losing 40 percent of their value.
“All investments don’t all earn the same,” Godofsky said. If a state’s portfolio earns a higher rate of return, the state doesn’t have to add as much money into the plan. But if the portfolio of investments has too low a rate of return, the state is on the hook for contributing more of its funds, Godofsky explained.
Former Rep. Earl Pomeroy, senior counsel at Alston & Bird LLP, also referenced how wealth was “hammered” during the recession, with many baby boomers losing an average of 39 percent of the value in both their houses and retirement accounts. As baby boomers continue to age, Pomeroy wondered whether most Americans will have the funds to sustain the extra years. “There is enormous anxiety for baby boomers,” he said. “We are going to have an awful lot of people running out of assets.”
Proposed changes to state public pension plans include increases in employee contribution rates, new eligibility requirements, benefit formula alterations, reduction in cost-of-living rates and creating a mix of defined benefits and contributions. These plans have sparked legal challenges in 22 states, Madiar said, adding that the success of these challenges depends on how each state protects public pensions (through statutes, state constitutions or court decisions) and the applicability of the U.S. Constitution’s Contract Clause.
“Supreme Court says if you have an employee in the system today, you cannot cut that person’s benefits, even for benefits they haven’t earned, because that person has a contractual right to that pension plan being the same,” Godofsky said.
Some states legally define pensions as constituting property, while others view it as a benefit or income. Godofsky said that future pension accruals should be classified as income, in order to prevent the government from firing employees to avoid the financial liability of promising a pension. “States might lose important employees that have developed skills,” he said. “What you earn for future service is like a salary and shouldn’t be protected more than a salary.”
For Pomeroy, the problem is less about protecting budgets and more about financial solvency for all Americans. “Public pensions have been found a very important recruitment and retention tool for states and public-sector divisions,” Pomeroy said.
“Pension Funding Concerns: A Guide for Lawyers, Public Officials, Planners and Citizens” was sponsored by the ABA Section of State and Local Government Law and ABA Center for Professional Development.