Analysis of State & Local Pensions Suggests Uncertainty About Status of Current Employees

The Congressional Research Service recently issued a report on state and local public pensions. Among the issues addressed is what, if any, changes can be made for current employees. (The report states that benefits of already-retired employees have been seen as not subject to cutbacks but indicates that this concept is under challenge in some states.) There is no specific analysis of California although various states are referenced in the text.

The report indicates that while in the private sector it is clear that already-accrued benefits cannot be taken away, employers can terminate plans going forward or reduce future accrual formulas for current workers. It indicates that the ability of state and local governments to make such changes for current workers is uncertain and provides discussion, but not a definitive answer.

A sample from page 9 of the report: …The ability of states to modify their pension plans for current employees varies depending when a contract is deemed to exist, and this varies from state to state. For example, in some states, courts have held that an employee’s right to a pension cannot be changed in any way that reduced the benefit that would be payable upon the day of hire or the first day the employee could participate in the plan. This view entitles plan participants the most generous amount of protection for their pension benefits, as employees have a right to accrue benefits in the future. States may, however, alter the benefits available to new hires.

In other states, reductions in pension plan benefits could be prohibited when, under the terms of a state statute, a participant is eligible to receive a pension (e.g., the employee has fulfilled the plan’s service requirement).63 This approach is in line with federal requirements for private sector pension benefits. Under this view, retirement benefits must be provided for service already performed, but prospective plan modifications may still be acceptable. It is also possible that based on interpretation of a state statute, contractual rights to a pension take effect at other times. For example, interpreting an Ohio statute, one court found that the right to a pension benefit attached at retirement.

Despite the variation in when a contractual right to a public plan pension benefit begins, as noted above, state courts generally find that the benefits of individuals who have already retired may not be diminished or impaired.65 However, the modification of post-retirement benefits is currently being challenged by retired state workers in three states, Minnesota, North Dakota, and Colorado. The litigation is based on adjustments that the state legislatures made to post-retirement cost of living adjustments in an attempt to address pension plan underfunding…

The full report is at http://www.nasra.org/resources/CRS%20state%20and%20local%20legal%20framework%201104.pdf

Readers of this blog will know that the Regents last December approved a modified pension plan for new hires but not current employees. The issue is whether a state ballot proposition might override what the Regents did and cover current employees in some fashion.