Legal Discussion Of Local And State Government Rights to Modify Pensions

An excerpt from "Public pension benefits & the law: Two pension experts offer insights into legal aspects of pension benefit protections for local and state government workers" by Ronald A. Wirtz - Editor, fedgazette, January 2011:

Sponsor distress can absolutely play a role in the legal ability of states to reduce pension benefits. No matter what a state’s law is regarding public pension benefits, states always retain something called the “police power,” which allows states to take action necessary to preserve public safety, order and welfare.

In states that protect public pensions as contracts, the police power will allow changes provided that the changes are reasonable and necessary to serve an important public purpose. This is actually a very difficult legal standard to satisfy. Take, for example, a state that is in severe fiscal distress and desires to reduce future benefits to alleviate a budget deficit. Helping to solve the state’s fiscal crisis would likely be considered an “important public purpose.” But the United States Supreme Court has stated that for a change to be considered necessary, the state must establish, first, that no less drastic modification could have been implemented to accomplish the state’s goal and, second, that the state could not have achieved its public policy goal without the modification.

It’s unclear under existing rulings when a state’s fiscal crisis would be considered severe enough to warrant the modification of the state’s contracts and, even then, under what circumstances the court will consider benefit reductions to be necessary to achieve fiscal relief. We do not yet know to what extent a state would first have to cut spending and raise tax rates before it would be allowed to reduce contractually protected pension benefits.

Read the entire discussion here.