Understanding the legal limits on public pension reform

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Article Highlights

  • Law limits public pension reform options.

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  • 8 states have recent or pending lawsuits regarding public employee pension benefits.

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  • Predicting legal success of public pension plan changes is difficult at best.

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For a wide variety of reasons, many states and municipalities are turning a critical eye toward their employee retirement plans. As various parties debate the merits of different reform measures, it is important to keep in mind that in many states, the law limits potential reform options.

The legal protections that apply to state employee pension benefits are a matter of state, and not federal, law. As a result, no simple answer to the question of what changes to public pension plans are permissible exists. Rather, the unique law of each state must be examined to determine what is and is not permissible. In the early 1900s, when many courts first considered the issue of whether or to what extent public pension benefits were legally protected against change, the legal consensus was that such benefits were entitled to no protection whatsoever. Pensions were considered to be mere “gratuities” from the government that could be amended or withdrawn at any time and for any reason.

Over the next several decades, however, courts changed course and overwhelmingly rejected this approach, which left employees’ pensions completely vulnerable to unilateral change. In place of the “gratuity” approach, courts have, for the most part, adopted one of two legal theories to protect public pension benefits: the property interest approach or the contract approach.

This policy brief will provide an overview of the various approaches that states take to protect public employee pensions, discussing first the protections that apply to employees who have not yet retired and then those that apply to already-retired employees. It concludes with a look at recent litigation in several states challenging public pension plan changes.

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