Policy Brief – Legal Authority to Adjust State Pension Plan

Posted by on April 16th 2012 @ 8:28 am

Exorbitant retirement benefits are threatening the ability of states and municipalities to deliver essential government services, and, in up to 20 states and hundreds of municipal- ities, are threatening their very solvency.

States and municipalities struggle with a trillion, or even multi-trillion, dollar crisis of unfunded public employee retirement benefit obligations. As the Wall Street Journal’s David Wessel] says, “Bankruptcy is a last resort. To avoid it, state and local governments need an alternative that is less unappealing. They don’t have one yet.”1

Fortunately, they do have an appealing alternative as is becoming definitively clear.

There is growing bi-partisan recognition that exorbitant retirement benefits granted to civil service unions are threat- ening the ability of states and cities to provide essential services without implementing job-destroying tax increases. Indeed, even former San Francisco Mayor and State Assembly Speaker Willie Brown (D), a staunch public union supporter, recognizes that lucrative defined benefit pension plans are unsustainable. John Fund writes about a column Willie Brown authored for the San Francisco Chronicle in which Brown lamented that civil service was out of control.

“The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians — pushed by our friends in labor — gradually expanded pay and benefits … while keeping the job protections and layering on incredi- bly generous retirement packages.” Brown later told Fund, “When I was Speaker I was in charge of pass- ing spending. When I became mayor I was in charge of paying for that spending. It was a wake-up call.“2

Fortunately, a more appealing remedy than bankruptcy exists. It is contained in two U.S. Supreme Court cases, Energy Reserves Group v. Kansas Power & Light and United States Trust Company of New York v. New Jersey. States and, with state authority, municipalities, can unilaterally reduce excess retirement benefits under circumstances now

widely prevailing. There is a widespread misunderstanding in many states that the U.S. Constitution prohibits these adjustments, but there is no such prohibition.