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State Law Shouldn't Shield Public Pension Benefits

September 05, 2013

By Stephen Eide

The constitutions of seven states bar any reductions to public pension benefits. Though obviously attractive to government workers, how do such inflexible guarantees serve the public interest?

They don’t, judging by Detroit’s continuing struggles over its plan to override the Michigan Constitution’s pension protections in bankruptcy.

But no state has to put a city in this position. To prevent insolvent cities from repudiating pension debts they obviously can’t afford, Michigan and the other six states that protect pensions in their constitutions should rescind these protections.

Article IX, Section 24 of the Michigan Constitution states that "the accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby."

Alaska, Arizona, Hawaii, Illinois, Louisiana and New York have similar clauses in their state constitutions.

Collectively, these seven states owe about $151 billion for pensions, or 20% of the $757 billion in unfunded pension liability the Pew Center on the States calculates for all state governments. And that’s not counting the many billions owed by local governments, whose pension benefits are protected by the same constitutional provisions.

The New York, Illinois and Alaska constitutions go so far as to protect future accruals that is, compensation for work that has not even been performed.

A government employee can have his wages reduced, be required to pay more for his health benefits, or even be laid off, but the structure of his retirement benefits cannot, as a constitutional matter, be altered from the moment he enters public service.

But the greatest problems with constitutional public pension guarantees manifest themselves in the municipal bankruptcy process. (Most of the seven states grant at least limited access to bankruptcy, although any state at any time can authorize a city to file for bankruptcy if the fiscal situation becomes desperate enough.)

Immediately after Detroit filed for bankruptcy in mid-July, a lower court judge tried to stop the case, arguing that because the city had pledged to cut pensions in bankruptcy, filing for Chapter 9 violated the Michigan Constitution.

Although that was ultimately overruled, the city’s retirement systems have announced they intend to follow through with this reasoning to challenge Detroit’s eligibility for bankruptcy. Michigan’s attorney general, though generally supportive of the Detroit bankruptcy plan, has pledged to defend pensions during bankruptcy proceedings.

The case continues to move forward for now. But it’s already clear that Article IX, Section 24 of the Michigan Constitution is a problem Detroit doesn’t need and will complicate an already-uncertain struggle toward solvency.

To remove constitutional public pension guarantees would require a constitutional amendment. The feasibility of such an amendment varies from state to state, but generally requires direct voter approval and a supermajority vote by the state legislature.

All seven states have amended their constitutions several times in the last 20 years, and should consider pursuing the process again to remove their pension guarantees.

Such protections elevate what is fair to workers over what is affordable to taxpayers. We are a nation of laws and, ordinarily, everyone should be entitled to whatever compensation they were promised. But ordinary standards of fairness don’t apply to a bankrupt city, whose challenges are, by definition, extraordinary.

Bankruptcy, a long and costly process, should be guided as much as possible by the principle of shared sacrifice among creditors. Constitutional pension protections enhance the uncertainty of an already complicated process and deny negotiators the flexibility they need to reach an appropriate settlement with all parties.

Original Source: http://news.investors.com/ibd-editorials-perspective/090413-669808-amend-constitutions-that-protect-public-employee-pensions.htm#ixzz2e1NqnhWl

 

 
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