The economic downturn has placed enormous pressure on state budgets. The recession hit state pension funding plans for public employees particularly hard. Some projections indicate that, even with as much as an 8% return on their pension fund investments, seven states' funds will be out of money by 2020, and half of states' funds will be fully depleted by 2027.
State legislatures are scrambling to pass measures designed to return their pension funds to solvency. Most proposals only call for decreases in the amount of pension benefits provided to future retirees, but four states have gone much further. Colorado, Minnesota, South Dakota, and New Jersey have all passed pension reforms that reduce the amount of benefits to which already-retired public employees are entitled. These reforms have serious financial consequences for those retirees. In Colorado, a retiree who received a pension of $33,264 in 2009 could lose more than $165,000 in benefits over a twenty-year period. In Minnesota, a retiree receiving an annual pension of $29,076 in 2008 could lose approximately $28,000 in benefits over the next ten years. In South Dakota, the average retiree could take home between $40,264.42 and $77,414.68 less in pension benefits because of the recently enacted reforms. The New Jersey reforms are likely to have a similar impact.
This Note analyzes the permissibility, under the U.S. Constitution, of public employee pension reforms that alter the amount of benefits to which retired employees are entitled, and proposes a solution to ensure the continued solvency of state public employee pension funds. Part II examines the underlying causes of the current pension crisis. Part III discusses current state attempts to reduce the pension benefits of retired public employees and explains the legal challenges to these reforms that are currently pending in state courts. Part IV analyzes the legal claims in more detail and explores whether pension reforms that reduce benefits for retired public employees violate substantive due process, the Takings Clause, or the Contracts Clause of the U.S. Constitution. Part V proposes that Congress encourage states to enact minimum funding requirements, similar to those in the Employee Retirement Income Security Act of 1974 ("ERISA") that govern private employee pensions, by allowing states that choose to adopt such requirements to issue tax-exempt bonds for the purpose of funding public employee pensions.
When a Promise Isn't a Promise: Public Employers' Ability to Alter Pension Plans of Retired Employees,
64 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol64/iss5/7